FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One) | |||
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
For the quarterly period ended March 4, 2004 | |||
OR | |||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
For the transition period from to | |||
Commission file number 1-10658 | |||
Micron Technology, Inc. | |||
(Exact name of registrant as specified in its charter) | |||
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIESEXCHANGE ACT OF 1934
For the quarterly period ended May 29, 2003
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934
Commission File Number: 1-10658
Micron Technology, Inc.
(Exact name of registrant as specified in its charter)
State or other jurisdiction of incorporation or organization: Delaware
Internal Revenue Service - Employer Identification No. 75-1618004
8000 S. Federal Way, P.O. Box 6, Boise, Idaho 83707-0006
(Address of principal executive offices)
(208) 368-4000
(Registrant’s telephone number, including area code)
Delaware | 75-1618004 | |
(State or other jurisdiction of | (IRS Employer | |
8000 S. Federal Way, P.O. Box 6, Boise, Idaho | 83707-0006 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code | (208) 368-4000 |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes ý No o
The number of outstanding shares of the registrant’s common stock as of July 8, 2003,April 12, 2004, was 609,869,996.610,533,796.
PartPART I. FINANCIAL INFORMATION
Consolidated Statements of Operations
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| Quarter ended |
| Nine months ended |
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| May 29, |
| May 30, |
| May 29, |
| May 30, |
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| March 4, |
| February 27, |
| March 4, |
| February 27, |
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Net sales |
| $ | 732.7 |
| $ | 771.2 |
| $ | 2,202.8 |
| $ | 1,841.0 |
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| $ | 991.0 |
| $ | 785.0 |
| $ | 2,098.2 |
| $ | 1,470.1 |
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Cost of goods sold |
| 661.7 |
| 603.0 |
| 2,393.0 |
| 1,742.4 |
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| 742.8 |
| 1,008.9 |
| 1,564.0 |
| 1,731.3 |
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Gross margin |
| 71.0 |
| 168.2 |
| (190.2 | ) | 98.6 |
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| 248.2 |
| (223.9 | ) | 534.2 |
| (261.2 | ) | ||||||||
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Selling, general and administrative |
| 87.2 |
| 77.2 |
| 276.0 |
| 236.4 |
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| 81.8 |
| 92.4 |
| 163.0 |
| 188.8 |
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Research and development |
| 161.7 |
| 134.4 |
| 490.3 |
| 424.8 |
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| 187.9 |
| 174.1 |
| 374.3 |
| 328.6 |
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Restructure charge |
| (5.4 | ) | — |
| 102.5 |
| — |
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Restructure |
| (0.1 | ) | 107.9 |
| (21.2 | ) | 107.9 |
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Other operating (income) expense |
| 11.2 |
| 3.3 |
| 21.9 |
| (4.9 | ) |
| (14.3 | ) | 2.3 |
| 3.5 |
| 10.7 |
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Operating loss |
| (183.7 | ) | (46.7 | ) | (1,080.9 | ) | (557.7 | ) | |||||||||||||||||
Operating income (loss) |
| (7.1 | ) | (600.6 | ) | 14.6 |
| (897.2 | ) | |||||||||||||||||
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Interest income |
| 3.9 |
| 10.4 |
| 15.0 |
| 42.5 |
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| 3.5 |
| 4.7 |
| 7.3 |
| 11.1 |
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Interest expense |
| (12.2 | ) | (5.4 | ) | (24.9 | ) | (12.1 | ) |
| (8.4 | ) | (7.8 | ) | (17.7 | ) | (12.7 | ) | ||||||||
Other non-operating income (expense) |
| 1.0 |
| 1.4 |
| 3.7 |
| (6.8 | ) | |||||||||||||||||
Loss before taxes |
| (191.0 | ) | (40.3 | ) | (1,087.1 | ) | (534.1 | ) | |||||||||||||||||
Other non-operating income |
| 1.2 |
| 2.1 |
| 1.6 |
| 2.7 |
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Income (loss) before taxes |
| (10.8 | ) | (601.6 | ) | 5.8 |
| (896.1 | ) | |||||||||||||||||
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Income tax (provision) benefit |
| (23.9 | ) | 16.1 |
| (62.9 | ) | 213.6 |
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Income tax provision |
| (17.5 | ) | (17.6 | ) | (33.0 | ) | (39.0 | ) | |||||||||||||||||
Net loss |
| $ | (214.9 | ) | $ | (24.2 | ) | $ | (1,150.0 | ) | $ | (320.5 | ) |
| $ | (28.3 | ) | $ | (619.2 | ) | $ | (27.2 | ) | $ | (935.1 | ) |
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Loss per share: |
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Basic |
| $ | (0.36 | ) | $ | (0.04 | ) | $ | (1.90 | ) | $ | (0.53 | ) |
| $ | (0.04 | ) | $ | (1.02 | ) | $ | (0.04 | ) | $ | (1.55 | ) |
Diluted |
| (0.36 | ) | (0.04 | ) | (1.90 | ) | (0.53 | ) |
| (0.04 | ) | (1.02 | ) | (0.04 | ) | (1.55 | ) | ||||||||
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Number of shares used in per share calculations: |
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Basic |
| 608.3 |
| 602.3 |
| 606.9 |
| 600.7 |
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| 643.2 |
| 607.2 |
| 638.4 |
| 606.2 |
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Diluted |
| 608.3 |
| 602.3 |
| 606.9 |
| 600.7 |
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| 643.2 |
| 607.2 |
| 638.4 |
| 606.2 |
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See accompanying notes to consolidated financial statements.
1
MICRON TECHNOLOGY, INC.
Consolidated Balance Sheets
As of |
| May 29, |
| August 29, |
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| March 4, |
| August 28, |
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Assets |
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Cash and equivalents |
| $ | 679.8 |
| $ | 398.2 |
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| $ | 509.2 |
| $ | 570.3 |
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Short-term investments |
| 324.0 |
| 587.5 |
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| 702.5 |
| 351.5 |
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Receivables |
| 495.5 |
| 537.9 |
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| 710.7 |
| 642.5 |
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Inventories |
| 431.1 |
| 545.4 |
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| 445.4 |
| 417.4 |
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Prepaid expenses |
| 31.7 |
| 35.6 |
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| 39.8 |
| 27.7 |
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Deferred income taxes |
| — |
| 14.2 |
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| 20.2 |
| 27.6 |
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Total current assets |
| 1,962.1 |
| 2,118.8 |
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| 2,427.8 |
| 2,037.0 |
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Intangible assets, net |
| 295.4 |
| 317.0 |
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| 277.6 |
| 289.6 |
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Property, plant and equipment, net |
| 4,576.2 |
| 4,699.5 |
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| 4,535.9 |
| 4,510.5 |
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Deferred income taxes |
| 81.0 |
| 124.8 |
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| 70.7 |
| 83.7 |
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Restricted cash |
| 101.7 |
| 51.6 |
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| 126.2 |
| 125.2 |
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Other assets |
| 126.2 |
| 243.7 |
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| 87.7 |
| 112.2 |
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Total assets |
| $ | 7,142.6 |
| $ | 7,555.4 |
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| $ | 7,525.9 |
| $ | 7,158.2 |
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Liabilities and shareholders’ equity |
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Accounts payable and accrued expenses |
| $ | 631.3 |
| $ | 554.1 |
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| $ | 733.8 |
| $ | 714.7 |
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Deferred income taxes |
| 4.5 |
| — |
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Deferred income |
| 21.5 |
| 25.5 |
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| 33.1 |
| 22.7 |
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Equipment purchase contracts |
| 144.3 |
| 80.0 |
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| 78.2 |
| 166.7 |
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Current portion of long-term debt |
| 93.7 |
| 93.1 |
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| 85.3 |
| 88.9 |
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Total current liabilities |
| 895.3 |
| 752.7 |
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| 930.4 |
| 993.0 |
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Long-term debt |
| 1,002.8 |
| 360.8 |
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| 1,046.7 |
| 997.1 |
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Deferred income taxes |
| 42.7 |
| 41.3 |
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Other liabilities |
| 92.4 |
| 75.3 |
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| 100.6 |
| 89.3 |
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Total liabilities |
| 1,990.5 |
| 1,188.8 |
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| 2,120.4 |
| 2,120.7 |
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Commitments and contingencies |
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Redeemable common stock |
| 64.9 |
| 60.2 |
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| — |
| 66.5 |
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Common stock, $0.10 par value, authorized 3.0 billion shares, issued and outstanding 608.7 million and 602.9 million shares |
| 60.7 |
| 60.3 |
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Common stock, $0.10 par value, authorized 3.0 billion shares, issued and outstanding 609.5 million and 609.9 million shares |
| 61.0 |
| 60.8 |
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Additional capital |
| 4,167.7 |
| 4,229.6 |
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| 4,638.8 |
| 4,176.3 |
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Retained earnings |
| 858.5 |
| 2,015.5 |
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| 705.7 |
| 733.8 |
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Accumulated other comprehensive income |
| 0.3 |
| 1.0 |
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| — |
| 0.1 |
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Total shareholders’ equity |
| 5,087.2 |
| 6,306.4 |
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| 5,405.5 |
| 4,971.0 |
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Total liabilities and shareholders’ equity |
| $ | 7,142.6 |
| $ | 7,555.4 |
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| $ | 7,525.9 |
| $ | 7,158.2 |
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See accompanying notes to consolidated financial statements.
2
Consolidated Statements of Cash Flows
For the nine months ended |
| May 29, |
| May 30, |
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Six months ended |
| March 4, |
| February 27, |
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Cash flows from operating activities |
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Net loss |
| $ | (1,150.0 | ) | $ | (320.5 | ) |
| $ | (27.2 | ) | $ | (935.1 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
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Depreciation and amortization |
| 911.1 |
| 881.9 |
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| 608.1 |
| 610.1 |
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Noncash restructure and other charges |
| 82.2 |
| — |
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| (30.9 | ) | 115.7 |
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Provision to write down inventories to estimated market values |
| 302.8 |
| 202.5 |
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| — |
| 288.2 |
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Loss from write-down or disposition of equipment |
| 22.4 |
| 10.5 |
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Loss (gain) from write-down or disposition of equipment |
| (8.0 | ) | 11.6 |
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Loss (gain) from write-down or disposition of investments |
| (0.6 | ) | 9.7 |
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| 0.5 |
| (0.7 | ) | ||||
Additional capital tax effect of stock plans |
| — |
| 12.2 |
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Change in operating assets and liabilities: |
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Decrease in receivables |
| 43.1 |
| 191.1 |
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(Increase) decrease in receivables |
| (68.1 | ) | 55.0 |
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Increase in inventories |
| (204.4 | ) | (346.4 | ) |
| (27.3 | ) | (125.2 | ) | ||||
Increase (decrease) in accounts payable and accrued expenses |
| 71.4 |
| (6.7 | ) |
| (4.8 | ) | 64.8 |
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Deferred income taxes |
| 63.0 |
| (122.6 | ) |
| 25.7 |
| 37.0 |
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Other |
| 31.3 |
| (18.9 | ) |
| 18.3 |
| 3.9 |
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Net cash provided by operating activities |
| 172.3 |
| 492.8 |
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| 486.3 |
| 125.3 |
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Cash flows from investing activities |
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Purchases of available-for-sale securities |
| (1,059.5 | ) | (319.7 | ) | |||||||||
Expenditures for property, plant and equipment |
| (674.0 | ) | (475.2 | ) |
| (468.5 | ) | (545.7 | ) | ||||
Purchases of available-for-sale securities |
| (584.8 | ) | (1,807.9 | ) | |||||||||
Proceeds from maturities of available-for-sale securities |
| 687.1 |
| 1,540.5 |
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| 595.6 |
| 533.0 |
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Proceeds from sales of available-for-sale securities |
| 319.1 |
| 521.5 |
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| 112.0 |
| 241.6 |
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Increase in restricted cash |
| (50.0 | ) | — |
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Purchase of DRAM assets from Toshiba |
| — |
| (252.4 | ) | |||||||||
Proceeds from sales of property, plant and equipment |
| 9.0 |
| 2.1 |
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| 69.9 |
| 4.8 |
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Other |
| (27.6 | ) | (67.2 | ) |
| (10.9 | ) | (21.8 | ) | ||||
Net cash used for investing activities |
| (321.2 | ) | (538.6 | ) |
| (761.4 | ) | (107.8 | ) | ||||
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Cash flows from financing activities |
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Proceeds from issuance of stock rights |
| 450.0 |
| — |
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Proceeds from issuance of debt |
| 667.5 |
| — |
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| 63.5 |
| 667.5 |
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Proceeds from issuance of common stock |
| 12.4 |
| 37.6 |
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Proceeds from equipment sale-leaseback transactions |
| 60.6 |
| — |
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| 10.6 |
| 60.6 |
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Proceeds from issuance of common stock |
| 45.0 |
| 59.6 |
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Payments on equipment purchase contracts |
| (123.4 | ) | (74.4 | ) |
| (200.8 | ) | (90.1 | ) | ||||
Purchase of call spread options |
| (109.1 | ) | — |
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Redemption of common stock |
| (67.5 | ) | — |
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Repayments of debt |
| (92.8 | ) | (74.8 | ) |
| (54.2 | ) | (50.1 | ) | ||||
Debt issuance costs |
| (17.3 | ) | — |
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| (0.1 | ) | (17.1 | ) | ||||
Net cash provided by (used for) financing activities |
| 430.5 |
| (89.6 | ) | |||||||||
Purchase of call spread options |
| — |
| (109.1 | ) | |||||||||
Other |
| 0.1 |
| 0.1 |
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Net cash provided by financing activities |
| 214.0 |
| 499.4 |
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Net increase (decrease) in cash and equivalents |
| 281.6 |
| (135.4 | ) |
| (61.1 | ) | 516.9 |
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Cash and equivalents at beginning of period |
| 398.2 |
| 469.1 |
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| 570.3 |
| 398.2 |
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Cash and equivalents at end of period |
| $ | 679.8 |
| $ | 333.7 |
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| $ | 509.2 |
| $ | 915.1 |
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Supplemental disclosures |
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Income taxes refunded, net |
| $ | 105.2 |
| $ | 532.2 |
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| $ | 2.8 |
| $ | 104.9 |
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Interest paid, net of amounts capitalized |
| (19.0 | ) | (15.0 | ) |
| (13.4 | ) | (8.2 | ) | ||||
Noncash investing and financing activities: |
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Equipment acquisitions on contracts payable and capital leases |
| 250.4 |
| 98.2 |
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| 118.5 |
| 188.7 |
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See accompanying notes to consolidated financial statements.
3
MICRON TECHNOLOGY, INC.
Notes to Consolidated Financial Statements
Basis of presentation: Micron Technology, Inc., and its subsidiaries (hereinafter referred to collectively as the “Company”) manufacturesmanufacture and marketsmarket DRAMs, Flash memory, CMOS image sensors and other semiconductor componentscomponents. The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles and memory modules.include the accounts of the Company and its consolidated subsidiaries. All significant intercompany accountstransactions and transactionsbalances have been eliminated. The Company’s fiscal year is the 52 or 53-week period ending on the Thursday closest to August 31. The Company’s thirdfiscal 2004 contains 53 weeks and its first quarter of fiscal 20032004 contained 14 weeks. The Company’s second quarter of fiscal 2004 and 20022003 ended on May 29,March 4, 2004, and February 27, 2003, and May 30, 2002, respectively. The Company’s fiscal 20022003 ended on August 29, 2002.28, 2003. All period references are to the Company’s fiscal periods unless otherwise indicated. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the consolidated financial position of the Company and its consolidated results of operations and cash flows. All period references are to the Company’s fiscal periods unless otherwise indicated.
These interim financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended August 29, 2002.28, 2003.
Reclassifications: Certain reclassifications have been made, none of which affected results of operations, to present the financial statements on a consistent basis.
Recently issued accounting standards: In MayDecember 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 requires that certain financial instruments, which under previous guidance could be accounted for as equity, be classified as liabilities in statements of financial position. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and is otherwise effective for the Company in the first quarter of 2004. The Company does not expect the adoption of SFAS No. 150 to have a significant impact on the Company’s future results of operations or financial condition.
In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003. The Company does not expect the adoption of SFAS No. 149 to have a significant impact on the Company’s future results of operations or financial condition.
In January 2003, the FASB issuedrevised Interpretation No. 46, “Consolidation of Variable Interest Entities – an interpretation of ARB No. 51,” which provides guidance on the identification of and reporting for variable interest entities. Interpretation No. 46 expands the criteria for consideration in determining whether a variable interest entity should be consolidated. Interpretation No. 46 is effective immediately for variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. Interpretation No. 46 is effective for the Company in the firstthird quarter of 2004 for variable interest entities acquired before February 1, 2003.2004. The Company is currently assessing the impactdoes not expect adoption of Interpretation No. 46 to have a significant impact on its future results of operations andor financial condition.
Segment information: The Company has determined, based on the nature of its operations and products offered to customers, that its only reportable segment is Semiconductor Operations. The Semiconductor Operations segment’s primary product is DRAM.
Product warranty:Stock-based compensation: Employee stock plans are accounted for using the intrinsic value method prescribed by APB No. 25, “Accounting for Stock Issued to Employees.” The Company generally providesutilizes the Black-Scholes option valuation model to value stock options for pro forma presentation of income and per share data as if the fair value based method in Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” had been used to account for stock-based compensation. The following presents pro forma loss and per share data as if a limited warranty that its products are in compliance with Company specifications existing at the time of delivery. Under the Company’s general terms and conditions of sale, liabilityfair value based method had been used to account for certain failures of product during a stated warranty period is usually limited to repair or replacement of defective items or return of, or a credit with respect to, amounts paid for such items. Under certain circumstances the Company may provide more extensive limited warranty coverage and general legal principlesstock-based compensation:
4
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| Quarter ended |
| Six months ended |
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| March 4, |
| February 27, |
| March 4, |
| February 27, |
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Net loss, as reported |
| $ | (28.3 | ) | $ | (619.2 | ) | $ | (27.2 | ) | $ | (935.1 | ) |
Redeemable common stock accretion |
| — |
| (1.6 | ) | (0.5 | ) | (3.1 | ) | ||||
Redeemable common stock fair value adjustment |
| — |
| — |
| (0.4 | ) | — |
| ||||
Net loss available to common shareholders |
| (28.3 | ) | (620.8 | ) | (28.1 | ) | (938.2 | ) | ||||
Stock-based compensation expense included in reported net loss |
| 0.3 |
| (0.3 | ) | 0.3 |
| (0.2 | ) | ||||
Less total stock-based compensation expense determined under a fair value based method for all awards |
| (58.6 | ) | (62.0 | ) | (113.3 | ) | (139.7 | ) | ||||
Pro forma net loss available to common shareholders |
| $ | (86.6 | ) | $ | (683.1 | ) | $ | (141.1 | ) | $ | (1,078.1 | ) |
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Loss per share: |
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Basic, as reported |
| $ | (0.04 | ) | $ | (1.02 | ) | $ | (0.04 | ) | $ | (1.55 | ) |
Basic, pro forma |
| (0.13 | ) | (1.12 | ) | (0.22 | ) | (1.78 | ) | ||||
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Diluted, as reported |
| $ | (0.04 | ) | $ | (1.02 | ) | $ | (0.04 | ) | $ | (1.55 | ) |
Diluted, pro forma |
| (0.13 | ) | (1.12 | ) | (0.22 | ) | (1.78 | ) |
may, under certain circumstances, impose upon
Stock-based compensation expense in the Company more extensive liability than that provided underabove presentation does not reflect a benefit for income taxes, which is consistent with the Company’s general terms and conditions. The Company’s warranty obligations are not material.treatment of income or loss from its U.S. operations.
Receivables |
| May 29, |
| August 29, |
|
| March 4, |
| August 28, |
| ||||
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Trade receivables |
| $ | 426.5 |
| $ | 370.7 |
|
| $ | 649.4 |
| $ | 552.5 |
|
Joint venture |
| 33.8 |
| 10.5 |
|
| 28.2 |
| 53.1 |
| ||||
Taxes other than income |
| 21.6 |
| 23.9 |
|
| 17.6 |
| 21.8 |
| ||||
Income taxes |
| 12.1 |
| 122.2 |
|
| 11.4 |
| 11.3 |
| ||||
Other |
| 8.0 |
| 16.8 |
|
| 8.1 |
| 8.6 |
| ||||
Allowance for doubtful accounts |
| (6.5 | ) | (6.2 | ) |
| (4.0 | ) | (4.8 | ) | ||||
|
| $ | 495.5 |
| $ | 537.9 |
|
| $ | 710.7 |
| $ | 642.5 |
|
Inventories |
| May 29, |
| August 29, |
|
| March 4, |
| August 28, |
| ||||
|
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Finished goods |
| $ | 128.5 |
| $ | 257.9 |
|
| $ | 97.7 |
| $ | 124.6 |
|
Work in process |
| 218.3 |
| 202.2 |
|
| 257.5 |
| 211.3 |
| ||||
Raw materials and supplies |
| 106.1 |
| 112.4 |
|
| 104.5 |
| 102.9 |
| ||||
Allowance for obsolescence |
| (21.8 | ) | (27.1 | ) |
| (14.3 | ) | (21.4 | ) | ||||
|
| $ | 431.1 |
| $ | 545.4 |
|
| $ | 445.4 |
| $ | 417.4 |
|
In the third, second and first quarters of 2003, the Company recognized write-downs of $14.6 million, $197.4 million and $90.8 million, respectively, to record work in process and finished goods inventories of semiconductor products at their estimated market values.
In the fourth, third, second and first quarters of 2002, the Company recognized write-downs of $173.6 million, $25.9 million, $3.8 million and $172.8 million, respectively, to record work in process and finished goods inventories of semiconductor products at their estimated market values.
Property, Plant and Equipment |
| May 29, |
| August 29, |
| ||
|
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| ||
Land |
| $ | 106.4 |
| $ | 106.3 |
|
Buildings |
| 2,296.0 |
| 2,219.8 |
| ||
Equipment |
| 6,450.8 |
| 6,024.9 |
| ||
Construction in progress |
| 244.9 |
| 294.2 |
| ||
Software |
| 197.9 |
| 194.6 |
| ||
|
| 9,296.0 |
| 8,839.8 |
| ||
Accumulated depreciation |
| (4,719.8 | ) | (4,140.3 | ) | ||
|
| $ | 4,576.2 |
| $ | 4,699.5 |
|
Depreciation expense was $287.8 million and $872.2 million for the third quarter and first nine months of 2003, respectively, and $281.3 million and $844.6 million in the third quarter and first nine months of 2002, respectively.
As part of a restructure plan announced in the second quarter of 2003, the Company recorded impairment charges of $44.6 million in the first nine months of 2003 to write down the carrying value of certain assets consisting primarily of assets used in the Company’s 200 mm production line in Virginia, which was shut down as part of the restructure plan. Assets classified as held for sale are included in other assets in the accompanying consolidated balance sheet. (See “Restructure and Other Charges” note.)
The Company’s Lehi, Utah facility, the construction of which was initiated in 1995, is at present only partially utilized by the Company for component test operations. Timing for completion of the Lehi facility is dependent
5
upon market conditions, including, but not limited to, worldwide market supply of, and demand for, semiconductor products and the Company’s operations, cash flows and alternative capacity utilization opportunities. As of May 29, 2003, construction in progress included costs of $196.7 million related to certain assets in Lehi, which were not ready for their intended use and were not being depreciated. As of May 29, 2003, the Company had assets in Lehi with a net book value of approximately $178.3 million, which were not in use but were being depreciated.
Accounts Payable and Accrued Expenses |
| May 29, |
| August 29, |
| ||
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| ||
Accounts payable |
| $ | 301.0 |
| $ | 278.9 |
|
Salaries, wages and benefits |
| 133.4 |
| 106.2 |
| ||
Joint venture |
| 54.2 |
| 52.8 |
| ||
Taxes other than income |
| 18.6 |
| 38.6 |
| ||
Restructure charge |
| 5.0 |
| — |
| ||
Other |
| 119.1 |
| 77.6 |
| ||
|
| $ | 631.3 |
| $ | 554.1 |
|
Debt |
| May 29, |
| August 29, |
| ||
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| ||
Convertible subordinated notes payable, interest rate of 2.5%, due February 2010 |
| $ | 632.5 |
| $ | — |
|
Notes payable in periodic installments through July 2015, weighted average interest rate of 2.4% and 2.3% |
| 199.3 |
| 241.7 |
| ||
Subordinated notes payable, face amount of $210.0 million and stated interest rate of 6.5%, due September 2005, with an effective yield to maturity of 10.7%, net of unamortized discount of $17.4 million and $22.2 million |
| 192.6 |
| 187.8 |
| ||
Capital lease obligations payable in monthly installments through December 2007, weighted average imputed interest rate of 5.8% and 2.4% |
| 72.1 |
| 24.4 |
| ||
|
| 1,096.5 |
| 453.9 |
| ||
Less current portion |
| (93.7 | ) | (93.1 | ) | ||
|
| $ | 1,002.8 |
| $ | 360.8 |
|
As of May 29, 2003, notes payable and capital lease obligations of $157.1 million and $14.7 million, respectively, were denominated in Japanese Yen and had weighted average interest rates of 1.5% and 1.8%, respectively.
In February 2003, the Company issued $632.5 million of 2.5% Convertible Subordinated Notes due February 1, 2010 (the “Notes”). The issuance costs associated with the Notes totaled $16.6 million and the net proceeds to the Company from the offering of the Notes were $615.9 million. Holders of the Notes may convert all or some of their Notes at any time prior to maturity, unless previously redeemed or repurchased, into the Company’s common stock at a conversion rate of 84.8320 shares for each $1,000 principal amount of Notes. This conversion rate is equivalent to a conversion price of approximately $11.79 per share. The Company may redeem the notes at any time after February 6, 2006, at declining premiums to par.
Concurrent with the issuance of the Notes, the Company purchased call spread options (the “Call Spread Options”) covering 53.7 million shares of the Company’s common stock, which is the number of shares issuable upon conversion of the Notes in full. The Call Spread Options have a lower strike price of $11.79, a higher strike price of $18.19, may be settled at the Company’s option either in cash or net shares and expire on January 29, 2008. Settlement of the Call Spread Options in cash on January 29, 2008, the expiration date, would result in the Company receiving an amount ranging from zero if the market price per share of the Company’s common stock is at or below $11.79 to a maximum of $343.4 million if the market price per share of the Company’s common stock is at or above $18.19. Settlement of the Call Spread Options in net shares on the expiration date would result in the Company
6
receiving a number of shares of the Company’s common stock, not to exceed 18.9 million shares, with a value equal to the amount otherwise receivable on cash settlement. Should there be an early unwind of the Call Spread Options, the amount of cash or net shares potentially received by the Company will be dependent upon then existing overall market conditions, and on the Company’s stock price, the volatility of the Company’s stock and the amount of time remaining on the Call Spread Options. The Call Spread Options therefore have the potential of limiting the dilution associated with the conversion of the Notes from 53.7 million shares to as few as 34.8 million shares. The Call Spread Option transactions, including fees and costs of $109.1 million, are accounted for as capital transactions.
Intangible Assets May 29, 2003 August 29, 2002 Gross Accumulated Gross Accumulated Product and process technology $ 324.9 $ (113.3 ) $ 320.5 $ (91.5 ) Joint venture supply arrangement 105.0 (28.3 ) 98.0 (20.6 ) Other 14.7 (7.6 ) 15.0 (4.4 ) $ 444.6 $ (149.2 ) $ 433.5 $ (116.5 ) March 4, 2004 Gross Accumulated Gross Accumulated Product and process technology 341.7 $ (136.0 ) $ 328.1 $ (118.2 ) Joint venture (37.2 ) 105.0 ) Other ) 14.7 ) $ 457.6 $ (180.0 ) $ 447.8 $ (158.2 ) During the first six months of 2004, the Company capitalized $13.9 million for product and process technology with a weighted average useful life of ten years. During the first six months of 2003, the Company capitalized $17.8 million for product and process technology and $2.5 million for other intangible assets with weighted average useful lives of nine and three years, respectively. Amortization expense for intangible assets was $12.3 million and $25.8 million for the second quarter and first six months of 2004, respectively, and $13.0 million and $25.6 million for the second quarter and first six months of 2003, respectively. Annual amortization expense for intangible assets held as of March 4, 2004, is estimated to be $49.8 million for 2004, $47.0 million for 2005, $45.3 million for 2006, $43.4 million for 2007 and $42.7 million for 2008. Property, Plant and Equipment March 4, August 28, Land $ 109.0 $ 106.4 Buildings 2,307.2 2,305.9 Equipment 6,876.3 6,488.2 Construction in progress 255.1 240.8 Software 212.2 205.1 9,759.8 9,346.4 Accumulated depreciation (5,223.9 ) (4,835.9 ) $ 4,535.9 $ 4,510.5 Depreciation expense was $282.9 million and $581.7 million for the second quarter and first six months of 2004, respectively, and $297.3 million and $584.4 million for the second quarter and first six months of 2003, respectively. As of March 4, 2004, the Company had assets classified as held for sale and included in other assets in the accompanying consolidated balance sheet with a carrying value of $9.3 million. The Company has manufacturing facilities in Virginia and Utah that are only partially utilized. As of March 4, 2004, the Virginia and Utah facilities had net book values of $374.1 million and $785.8 million, respectively. A portion of the Virginia facility is being used for 300 mm wafer fabrication and a portion of the Utah facility is being used for component test operations. The Company is depreciating substantially all assets at the Virginia and Utah facilities other than $195.6 million of construction in progress in Utah as of March 4, 2004. Increased utilization of these facilities is dependent upon market conditions, including, but not limited to, worldwide market supply of, and demand for, semiconductor products and the Company’s operations, cash flows and alternative capacity utilization opportunities. Accounts Payable and Accrued Expenses March 4, August 28, Accounts payable $ 383.4 $ 340.8 Salaries, wages and benefits 128.4 116.9 Joint venture 64.4 102.5 Taxes other than income 22.5 23.8 Other 135.1 130.7 $ 733.8 $ 714.7 6 Debt March 4, August 28, Convertible subordinated notes payable, interest rate of 2.5%, due February 2010 $ 643.5 $ 632.5 Subordinated notes payable, face amount of $210.0 million and stated interest rate of 6.5%, due September 2005, with an effective yield to maturity of 10.7%, net of unamortized discount of $12.1 million and $15.8 million 197.9 194.2 Notes payable in periodic installments through July 2015, weighted average interest rate of 3.0% and 2.3% 224.9 192.9 Capital lease obligations payable in monthly installments through January 2008, weighted average imputed interest rate of 6.2% and 6.0% 65.7 66.4 1,132.0 1,086.0 Less current portion (85.3 ) (88.9 ) $ 1,046.7 $ 997.1 As of March 4, 2004, notes payable and capital lease obligations of $136.6 million and $7.6 million, respectively, denominated in Japanese yen, were at weighted average interest rates of 1.4% and 1.8%, respectively. Interest Rate Swap: The Company entered into an interest rate swap agreement (the “Swap”) that effectively converted, beginning August 29, 2003, the fixed interest rate on the Notes to a variable interest rate based on the 3-month London Interbank Offering Rate (“LIBOR”) less 65 basis points (0.53% for the second quarter of 2004). The Swap qualifies as a fair-value hedge under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” The gain or loss from changes in the fair value of the Swap is expected to be highly effective at offsetting the gain or loss from changes in the fair value of the Notes attributable to changes in interest rates. The Company measures the effectiveness of the Swap using regression analysis. The Company recognizes changes in the fair value of the Swap and changes in the fair value of the Notes since inception of the Swap in the consolidated balance sheets. For the first six months of 2004, the Company recognized a net gain of $0.2 million, which is included in other non-operating income, representing the difference between the change in the fair value of the Notes and the change in the fair value of the Swap. As of March 4, 2004, the Company had pledged $24.4 million as collateral for the Swap which is included in restricted cash on the Company’s consolidated balance sheet. The amount of collateral will fluctuate based on the fair value of the Swap. The Swap will terminate if the closing price of the Company’s common stock is at or exceeds $14.15 after February 6, 2006. As is typical in the semiconductor and other high technology industries, from time to time, others have asserted, and may in the future assert, that the Company’s products or manufacturing processes infringe their intellectual property rights. The Company is currently engaged in litigation with Rambus, Inc. (“Rambus”) relating to certain of Rambus’ patents and certain of the Company’s claims and defenses. Lawsuits between Rambus and the Company are pending in the United States, Germany, France, the United Kingdom and Italy. The Company is unable to predict the outcome of the Rambus suits or of other assertions of infringements made against the Company. A court determination that the Company’s products or manufacturing processes infringe the intellectual property rights of others could result in significant liability and/or require the Company to make material changes to its products and/or manufacturing processes. Any of the foregoing results could have a material adverse effect on the Company’s business, results of operations or financial condition. On June 17, 2002, the Company received a grand jury subpoena from the U.S. District Court for the Northern District of California seeking information regarding an investigation by the Antitrust Division of the Department of Justice (the “DOJ”) into possible antitrust violations in the “Dynamic Random Access Memory” or “DRAM” industry. The Company is cooperating fully and actively with the DOJ in its investigation. Subsequent to the commencement of the DOJ investigation, twenty-five purported class action lawsuits were filed against the Company and other DRAM suppliers in various federal and state courts alleging violations of the Sherman Act, violations of state unfair competition law, and unjust enrichment relating to the sale and pricing of DRAM products. The complaints seek treble damages for the alleged damages sustained by purported class members, in addition to restitution, costs and attorneys’ fees, as well as an injunction against the allegedly unlawful conduct. The Company is unable to predict the outcome of these suits. Based upon the Company’s analysis of the claims made and the nature of the DRAM industry, the Company believes that class treatment of these cases is not appropriate and that any purported injury alleged by plaintiffs would be more appropriately resolved on a customer-by-customer basis. The final resolution of these alleged violations of federal or state antitrust laws could result in significant liability and could have a material adverse effect on the Company’s business, results of operations or financial condition. The Company has accrued a liability and charged operations for the estimated costs of adjudication or settlement of various asserted and unasserted claims existing as of the balance sheet date. The Company is currently a party to other legal actions arising out of the normal course of business, none of which is expected to have a material adverse effect on the Company’s business, results of operations or financial condition. In the normal course of business, the Company is a party to a variety of agreements pursuant to which it may be obligated to indemnify the other party. It is not possible to predict the maximum potential amount of future payments under these types of agreements due to the conditional nature of the Company’s obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the Company under these types of agreements have not had a material effect on the Company’s business, results of operations or financial condition. 7 In connection with the On September 24, 2003, the Company received $450.0 million, which is included in additional capital in the accompanying consolidated balance sheet, from Intel Corporation (“Intel”) in exchange for the issuance of stock rights exchangeable into approximately 33.9 million shares of the Company’s common Quarter ended Nine months ended May 29, May 30, May 29, May 30, Net loss $ (214.9 ) $ (24.2 ) $ (1,150.0 ) $ (320.5 ) Redeemable common stock accretion (1.6 ) (0.6 ) (4.7 ) (0.6 ) Net loss available to common shareholders $ (216.5 ) $ (24.8 ) $ (1,154.7 ) $ (321.1 ) Weighted average common shares outstanding 608.3 602.3 606.9 600.7 Loss per share: Basic $ (0.36 ) $ (0.04 ) $ (1.90 ) $ (0.53 ) Diluted (0.36 ) (0.04 ) (1.90 ) (0.53 ) Quarter ended Nine months ended May 29, May 30, May 29, May 30, Net loss, as reported $ (214.9 ) $ (24.2 ) $ (1,150.0 ) $ (320.5 ) Redeemable common stock accretion (1.6 ) (0.6 ) (4.7 ) (0.6 ) Net loss available to common shareholders (216.5 ) (24.8 ) (1,154.7 ) (321.1 ) Stock-based employee compensation expense included in reported net loss 0.3 — 0.1 1.3 Less total stock-based employee compensation expense determined under a fair value-based method for all awards, net of related tax effects (77.9 ) (65.3 ) (217.6 ) (196.9 ) Pro forma net loss available to common shareholders $ (294.1 ) $ (90.1 ) $ (1,372.2 ) $ (516.7 ) Loss per share: Basic, as reported $ (0.36 ) $ (0.04 ) $ (1.90 ) $ (0.53 ) Basic, pro forma (0.48 ) (0.15 ) (2.26 ) (0.86 ) Diluted, as reported (0.36 ) (0.04 ) (1.90 ) (0.53 ) Diluted, pro forma (0.48 ) (0.15 ) (2.26 ) (0.86 ) Quarter Adjustments Cumulative Restructure charge: Write-down of equipment $ 53.9 $ (9.3 ) $ 44.6 Severance and other termination benefits 25.5 0.7 26.2 Write-down of intangible assets 18.6 — 18.6 Other 9.9 3.2 13.1 Total restructure charge 107.9 (5.4 ) 102.5 Other: Write-down of raw materials and work in process inventories 7.8 (0.7 ) 7.1 Total restructure and other charges $ 115.7 $ (6.1 ) $ 109.6 Quarter ended Restructure charge: Write-down of equipment $ 53.9 Severance and other termination benefits 25.5 Write-down of intangible assets 18.6 Other 9.9 Total restructure charge 107.9 Other charges to write-down raw materials and work in process inventories 7.8 Total restructure and other charges $ 115.7 Other operating expense for the second quarter of The income tax provision for the second quarter and first six months of 2004 and 2003 primarily reflects taxes on non-U.S. operations. As of March 4, 2004, the Company had aggregate U.S. tax net operating loss carryforwards of $2.9 billion and unused U.S. tax credits of $104.9 million, which expire in various years through 2024. The Company also has unused state tax net operating loss carryforwards of $1.9 billion for tax purposes which expire in various years through 2024 and unused state tax credits of $121.0 million for tax and financial reporting purposes which expire through 2018. Until the Company utilizes these net operating loss carryforwards and unused tax credits, the Company expects its income tax provision will primarily reflect taxes from the Company’s non-U.S. operations. Basic earnings per share is computed based on the weighted average number of common shares outstanding. Diluted earnings per share is computed based on the weighted average number of common shares outstanding plus the dilutive effects of stock options and warrants and convertible notes. Potential common shares that would increase earnings per share amounts or decrease loss per share amounts are antidilutive and are therefore excluded from earnings per share calculations. Potential common shares that could dilute basic earnings per share in the future that were not included in the computation of diluted earnings per share because to do so would have been antidilutive were 188.3 million shares and 179.7 million shares as of the end of the second quarter of 2004 and 2003, respectively. Basic and diluted earnings per share computations reflect the effect of accretion of, and fair value adjustment to, redeemable common stock. 9 Quarter ended Six months ended March 4, February 27, March 4, February 27, Net loss $ (28.3 ) $ (619.2 ) $ (27.2 ) $ (935.1 ) Redeemable common stock accretion — (1.6 ) (0.5 ) (3.1 ) Redeemable common stock fair value adjustment — — (0.4 ) — Net loss available to common shareholders $ (28.3 ) $ (620.8 ) $ (28.1 ) $ (938.2 ) Weighted average common shares outstanding 643.2 607.2 638.4 606.2 Loss per share: Basic $ (0.04 ) $ (1.02 ) $ (0.04 ) $ (1.55 ) Diluted (0.04 ) (1.02 ) (0.04 ) (1.55 ) Comprehensive loss was $28.3 million for the second quarter of 2004 and $27.3 million for the first six months of 2004, which included $0.1 million net of tax of unrealized loss on investments. Comprehensive loss for the second quarter and first six months of 2003 was $620.2 million and TECH Semiconductor Singapore Pte. Ltd. (“TECH”) is a semiconductor memory manufacturing joint venture in Singapore among Micron Technology, Inc., the Singapore Economic Development Board, Canon Inc. and Hewlett-Packard Company. The Company acquired its initial ownership and other interests in TECH as a result of its acquisition of the semiconductor memory operations of Texas Instruments Incorporated in 1998. As of March 4, 2004, the Company had a 39.12% ownership interest in TECH. Significant financing, investment and operating decisions for TECH typically require approval from TECH’s Board of Directors. The shareholders’ agreement for the TECH joint venture expires in 2011. TECH’s semiconductor manufacturing facilities use the Company’s product and process technology. Subject to specific terms and conditions, the Company has agreed to purchase all of the products manufactured by TECH. TECH supplied approximately 30% of the total megabits of memory produced by the Company in the second quarter and first six months of 2004. The Company generally purchases semiconductor memory products from TECH at prices determined quarterly, based on a discount from average selling prices realized by the Company for the immediately preceding quarter. The Company performs assembly and test services on product manufactured by TECH. The Company also provides certain technology, engineering and training to support TECH. All of these transactions with TECH are recognized as part of the net cost of products purchased from TECH. In the second quarter of 2004, the Company sold TECH semiconductor equipment in the amount of $0.1 million. The net cost of products purchased from TECH amounted to Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion contains trend information and other forward-looking statements that involve a number of risks and uncertainties. Forward-looking statements include, but are not limited to, statements such as those made in The Company is Results of Operations Third Quarter Nine Months Second Quarter First Quarter Six Months 2003 % of net 2002 % of net 2003 % of net 2002 % of net 2004 % of net 2003 % of net 2004 % of net 2004 % of net 2003 % of net Net sales $ 732.7 100.0 % $ 771.2 100.0 % $ 2,202.8 100.0 % $ 1,841.0 100.0 % $ 991.0 100.0 % $ 785.0 100.0 % $ 1,107.2 100.0 % $ 2,098.2 100.0 % $ 1,470.1 100.0 % Gross margin 71.0 9.7 % 168.2 21.8 % (190.2 ) (8.6 )% 98.6 5.4 % 248.2 25.0 % (223.9 ) (28.5 )% 286.0 25.8 % 534.2 25.5 % (261.2 ) (17.8 )% SG&A 87.2 11.9 % 77.2 10.0 % 276.0 12.5 % 236.4 12.8 % 81.8 8.3 % 92.4 11.8 % 81.2 7.3 % 163.0 7.8 % 188.8 12.8 % R&D 161.7 22.1 % 134.4 17.4 % 490.3 22.3 % 424.8 23.1 % 187.9 19.0 % 174.1 22.2 % 186.4 16.8 % 374.3 17.8 % 328.6 22.4 % Restructure charge (5.4 ) (0.7 )% — — 102.5 4.7 % — — Operating loss (183.7 ) (25.1 )% (46.7 ) (6.1 )% (1,080.9 ) (49.1 )% (557.7 ) (30.3 )% Restructure (0.1 ) (0.0 )% 107.9 13.7 % (21.1 ) (1.9 )% (21.2 ) (1.0 )% 107.9 7.3 % Operating income (loss) (7.1 ) (0.7 )% (600.6 ) (76.5 )% 21.7 2.0 % 14.6 0.7 % (897.2 ) (61.0 )% The Company’s second quarter of 2004, which ended March 4, 2004 and second quarter of 2003 were comprised of 13-week quarters as compared to 14 weeks for the first quarter of 2004. The Company’s operating results in recent periods have been significantly affected by the timing of inventory write-downs and restructure charges. The following table summarizes the Company’s operating Third Quarter Second Quarter Operating loss: As reported $ (183.7 ) $ (600.6 ) Inventory write-down 14.6 197.4 Estimated effect of previous write-downs (168.1 ) (98.6 ) Restructure and related charges (6.1 ) 115.7 As adjusted $ (343.3 ) $ (386.1 ) 11 Second Quarter First Quarter Six Months 2004 2003 2004 2004 2003 Operating income (loss): As reported $ (7.1 ) $ (600.6 ) $ 21.7 $ 14.6 $ (897.2 ) Period-end inventory write-down — 197.4 — — 197.4 Estimated net effect of previous write-downs (18.3 ) (98.6 ) (27.6 ) (45.9 ) (146.7 ) Restructure and related charges (0.2 ) 115.7 (20.9 ) (21.1 ) 115.7 As adjusted $ (25.6 ) $ (386.1 ) $ (26.8 ) $ (52.4 ) $ (730.8 ) Net Sales Net sales for the Net sales for the second quarter of 2004 increased by 26% as compared to the second quarter of 2003 Net sales for Gross Margin The Company’s reported gross margin 12 The Company’s reported gross margin for second quarter and first six months of 2004 as compared to the corresponding periods of 2003 improved by $472.1 million and $795.4 million, respectively, primarily due to reductions in per megabit manufacturing costs and to a lesser extent the net effects of inventory write-downs. Inventory write-downs: The Company has recorded charges to cost of goods sold to write down the The following table sets forth adjusted gross margins absent the inventory write-downs and the estimated Third Quarter Second Quarter Nine Months Second Quarter First Quarter Six Months 2003 % of 2002 % of 2003 % of 2003 % of 2002 % of 2004 % of net 2003 % of net 2004 % of net 2004 % of net 2003 % of net Gross margin: As reported $ 71.0 9.7 % $ 168.2 21.8 % $ (223.9 ) (28.5 )% $ (190.2 ) (8.6 )% $ 98.6 5.4 % $ 248.2 25.0 % $ (223.9 ) (28.5 )% $ 286.0 25.8 % $ 534.2 25.5 % $ (261.2 ) (17.8 )% Inventory write-down 14.6 25.9 197.4 302.8 202.5 Estimated effect of previous write-downs (168.1 ) (82.9 ) (98.6 ) (405.6 ) (657.2 ) Period-end inventory write-down — 197.4 — — 197.4 Estimated net effect of previous write-downs (18.3 ) (98.6 ) (27.6 ) (45.9 ) (146.7 ) As adjusted $ (82.5 ) (11.3 )% $ 111.2 14.4 % $ (125.1 ) (15.9 )% $ (293.0 ) (13.3 )% $ (356.1 ) (19.3 )% $ 229.9 23.2 % $ (125.1 ) (15.9 )% $ 258.4 23.3 % $ 488.3 23.3 % $ (210.5 ) (14.3 )% Depending on market conditions, the gross margin from the sale of TECH products may be higher or lower than the gross margin from the sale of products manufactured by the Company’s wholly-owned facilities. Selling, General and Administrative Selling, general and administrative 13 Research and Development Research and development (“R&D”) expenses vary primarily with the number of development wafers processed, the cost of advanced equipment dedicated to new product and process development, and personnel costs. R&D expenses for the second quarter and first six months increased 8% and 14%, respectively, from the corresponding periods of 2003 primarily due to increases in the number of development wafers processed and the Company’s ramp of wafers processed on its 300 mm production line. The increase in development wafers processed during the first six months of 2004 was the result of a relatively large number of products nearing qualification during the period. Higher R&D costs in 2004 also reflect a higher level of expenses related to CMOS image sensors and Flash products. R&D expenses for the third quarter of The Company’s Restructure and Other Charges As a result of the prolonged downturn in the semiconductor memory industry and the Quarter ended Restructure charge: Write-down of equipment $ 53.9 Severance and other termination benefits 25.5 Write-down of intangible assets 18.6 Other 9.9 Total restructure charge 107.9 Other charges to write-down raw materials and work in process inventories 7.8 Total restructure and other charges $ 115.7 14 Quarter Adjustments Cumulative Restructure charge: Write-down of equipment $ 53.9 $ (9.3 ) $ 44.6 Severance and other termination benefits 25.5 0.7 26.2 Write-down of intangible assets 18.6 — 18.6 Other 9.9 3.2 13.1 Total restructure charge 107.9 (5.4 ) 102.5 Other: Write-down of raw materials and work in process inventories 7.8 (0.7 ) 7.1 Total restructure and other charges $ 115.7 $ (6.1 ) $ 109.6 Other Operating Other operating expense for the second quarter of 2004 includes a $7.6 million benefit from changes in currency exchange rates primarily as the result of a generally stronger U.S. dollar relative to the Japanese yen and the euro. For the first six months of 2004, the Company recognized a net loss of $16.9 million from changes in currency exchange rates as gains in the second quarter of 2004 only partially offset $24.5 million of losses from changes in the first The Operating Activities: For the first six months of 2004, net cash flows from operating activities were $486.3 million. Cash generated from operations primarily reflects the Company’s net operating results in the first six months of 2004 adjusted by $608.1 million for non-cash depreciation and amortization expense. Investing Activities: For the first six months of 2004, expenditures for property, plant and equipment were $468.5 million. The Company believes that to develop new product and process technologies, support future growth, achieve operating efficiencies and maintain product quality, it must continue to invest in manufacturing technology, facilities and capital equipment, research and development, and product and process technology. The Company expects 2004 capital spending to approximate $1.5 billion, of which approximately $1.0 billion is expected to be spent in the second half of 2004. As of March 4, 2004, the Company had commitments extending into 2005 of approximately $450 million for the Financing Activities: For the first In the first quarter of 2004, the Company received $450 million from Intel Corporation (“Intel”) in exchange for the In the second quarter 15 Concurrent with the issuance of the Notes, the Company purchased call spread options (the “Call Spread Options”) covering 53.7 million shares of the Company’s common stock, which is the number of shares issuable upon conversion of the Notes in full. The Call Spread Options have a lower strike price of $11.79, a higher strike price of $18.19, may be settled at the Company’s option either in cash or net shares and expire on January 29, 2008. Settlement of the Call Spread Options in cash on January 29, 2008, would result in the Company receiving an amount ranging from zero if the market price per share of the Company’s common stock is at or below $11.79 to a maximum of $343.4 million if the market price per share of the Company’s common stock is at or above $18.19. Access to capital markets has historically been important to the Company. Depending on market conditions, the Company may, from time to time, issue registered or unregistered securities to raise capital to fund a portion of its The Company has pledged $100 million as cash collateral for a $250 million credit facility of TECH. In the event the cash collateral is used to discharge obligations of TECH that are unpaid and due under the TECH credit facility, certain shareholders of TECH have agreed to indemnify the Company for approximately one-half of the amount of the cash collateral used to satisfy such obligations. As of Fiscal year Notes Capital leases Operating leases 2004 $ 38.4 $ 14.3 $ 5.0 2005 51.0 19.1 15.8 2006 261.1 24.7 12.6 2007 44.3 10.9 3.6 2008 24.3 3.9 3.3 2009 and thereafter 648.3 — 26.5 In Contingencies: The Company Inventories: Inventories are stated at the lower of average cost or market value. Cost includes labor, material and overhead costs, including product and process technology costs. Determining market value of inventories involves numerous judgments, including projecting average selling prices and sales volumes for future periods and costs to complete products in work in process inventories. To project average selling prices and sales volumes, the Company reviews recent sales volumes, existing U.S. GAAP provides for products to be grouped into Product and process technology: Costs incurred to acquire product and process technology or to patent technology developed by the Company are capitalized and amortized on a straight-line basis over periods currently ranging up to 10 years. The Company capitalizes a portion of costs incurred based on its analysis of historical and projected patents issued as a percent of patents filed. Capitalized product and process technology costs are amortized over the shorter of (i) the estimated useful life of the technology, (ii) the patent term or (iii) the term of the technology agreement. Property, plant and equipment: The Company reviews for impairment the carrying value of property, plant and equipment when events and circumstances indicate that the carrying value of an asset or group of assets may not be recoverable from the estimated future cash Fiscal year Notes Capital leases Operating leases 2003 $ 8.0 $ 6.4 $ 2.4 2004 66.4 25.4 8.1 2005 32.2 16.8 5.7 2006 242.0 23.4 3.8 2007 24.2 8.9 3.3 2008 and thereafter 669.0 — 27.6 In addition to the factors discussed elsewhere in this Form 10-Q, the following are important factors which could cause actual results or events to differ materially from those contained in any In six of the last seven fiscal years, we experienced annual decreases in per megabit average selling prices for our semiconductor memory products Increased worldwide DRAM production or lack of demand for The transition to smaller If the growth rate of either We are dependent on the We may not be able to generate sufficient cash flows to fund our operations and make adequate capital investments. Our cash flows from operations depend primarily on the volume of semiconductor memory sold, average selling prices and per megabit manufacturing costs. To develop new product and process technologies, support future growth, achieve operating efficiencies and maintain product quality, we must make significant capital investments in manufacturing technology, facilities and capital equipment, research and development, and product and process technology. In addition to cash provided by operations, we have from time to time utilized external sources of financing. Depending on general market and economic conditions or other factors, we may not be able to generate sufficient cash flows to fund our operations and make adequate capital investments or access capital markets for funds on acceptable terms. The semiconductor memory industry is highly competitive. We face intense competition from a number of companies, Historically, various governments have provided economic assistance to international competitors, which has enabled, or artificially supported, competitors’ production of semiconductor memory, particularly DRAM. This factor is expected to lead to a continued increase in the supply of DRAM and other semiconductor products in future periods. We may be unable to maintain or reduce per megabit manufacturing costs at the same rate as we have in the past. Historically, we have decreased per megabit manufacturing costs through improvements in our manufacturing processes, including reducing the die size of our existing products. In future periods, we may be unable to maintain our per megabit manufacturing costs or reduce costs at historical rates. • • • • offset increases in per megabit manufacturing costs resulting from shifts in product mix to CMOS image sensors and lower density products. If we are unable to successfully transition our operations to 300 mm wafer processing at the appropriate time, our business, results of operations or financial condition could be materially adversely affected. We have in the past reduced our per megabit manufacturing costs by transitioning to larger wafer sizes. By transitioning to larger wafers, we should be able to produce significantly more die for each wafer, ultimately resulting in substantially reduced costs for each die. Our transition to 300 mm wafer processing across a significant portion of our operations will require us to make substantial capital investments, which will depend on our ability to generate funds from operations or to obtain additional funds from external sources. We may also experience disruptions in manufacturing operations and reduced yields during our transition to larger wafer sizes. If we are unable to successfully transition to 300 mm wafer processing at the appropriate time, we could be at a cost disadvantage with respect to our competitors and our business, results of operations or financial condition could be materially adversely affected. If any one of our major computing customers significantly reduces its purchases of DRAM from us, our business, results of operations or financial condition could be materially adversely affected. Aggregate sales to two of our computing customers approximated 27% of our net sales for the second quarter of 2004. If any one of our major computing customers significantly reduces its purchases of DRAM from us, our business, results of operations or financial condition could be materially adversely affected. Changes in foreign currency exchange rates could materially adversely affect our business, results of operations or financial condition. The Company’s financial statements are prepared in accordance with U.S. GAAP and are reported in U.S. dollars. Across the Company’s multi-national operations there are transactions and balances denominated in other currencies, primarily the Japanese yen and euro. In the event that the U.S. dollar weakens significantly compared to the Japanese yen or euro, reported results of operations or financial condition will be adversely affected. 19 Current economic and political conditions may harm our business. Global economic conditions and the effects of military or terrorist actions may cause significant disruptions to worldwide commerce. If these disruptions result in delays or cancellations of customer orders, a decrease in corporate spending on information technology or our inability to effectively market, manufacture or ship our products, our business, results of operations or financial condition could be materially adversely affected. If, for any reason, we are unable to access the capital markets over an extended period of time, we may be unable to make property, plant and equipment expenditures, implement our research and development efforts or fund our operations, which could materially adversely affect our business, results of operations or financial condition. If our TECH joint venture experiences financial difficulty, or if our supply of semiconductor products from TECH is disrupted, our business, results of operations or financial condition could be materially adversely affected. TECH supplied approximately 30% of our total megabits of memory produced in the second quarter of 2004. We have agreements to purchase all of the products manufactured by TECH subject to specific terms and conditions. In recent periods, we have realized higher margins on products purchased from TECH than products manufactured by our wholly-owned facilities. Any reduction in supply could materially adversely affect our business, results of operations or financial condition. We have pledged $100 million as cash collateral for TECH’s credit facility. In the event the cash collateral is used to discharge obligations of TECH that are unpaid and due under the TECH credit facility, certain shareholders of TECH have agreed to indemnify us for approximately one-half of the amount of the cash collateral used to satisfy such obligations. As of March 4, 2004, we had remaining unamortized costs of $67.8 million in intangible assets relating to the supply arrangement to purchase product from TECH. In the event that our supply of semiconductor products from TECH is reduced or eliminated, we may be required to write off part or all of these assets and our revenues and results of operations would be adversely affected. If we are unable to respond to customer demand for diversified semiconductor memory products or are unable to do so in a cost-effective manner, we may lose market share and our business, results of operations In recent periods, the semiconductor memory market has become We need to dedicate significant resources to product design and development to respond to customer demand for the continued diversification of semiconductor products. If we are unable to invest sufficient resources to meet the diverse memory needs of customers, we may lose market share. In addition, as we diversify our product lines we may encounter difficulties penetrating certain markets, particularly markets where we do not have existing customers. If we are unable to respond to customer demand for market diversification in a cost-effective manner, our business, results of operations An adverse determination that our products As is typical in the semiconductor and other high technology industries, from time to time, others have asserted, and may in the future assert, that our products or manufacturing processes infringe their manufacturing processes. Any of the foregoing results could have a material adverse effect on our business, results of operations or financial condition. We have a number of patent and intellectual property license agreements. Some of these license agreements require us to make one time or periodic payments. We may need to obtain additional patent licenses or renew existing license agreements in the future. We are unable to predict whether these license agreements can be obtained or renewed on acceptable terms. Allegations of anticompetitive practices. On June 17, 2002, we received a grand jury subpoena from the U.S. District Court for the Northern District of California seeking information regarding an investigation by the Antitrust Division of the Department of Justice (the “DOJ”) into possible antitrust violations in the “Dynamic Random Access Memory” or “DRAM” industry. We are cooperating fully and actively with the DOJ in its investigation. Subsequent to the commencement of the DOJ investigation, 20 attorneys’ fees, and an injunction against the allegedly unlawful conduct. The foregoing federal district court cases were transferred to the U.S. District Court for the Northern District of California (San Francisco) for consolidated proceedings. On October 6, 2003, the plaintiffs filed a consolidated amended class action complaint. The consolidated amended complaint purports to be on behalf of a class of individuals and entities who purchased DRAM directly from the various On June 17, 2002, we received a grand jury subpoena from the U.S. District Court for the Northern District of California seeking information regarding an investigation by the Antitrust Division of the Department of Justice (the “DOJ”) into possible antitrust violations in the “Dynamic Random Access Memory” or “DRAM” industry. We are cooperating fully and actively with the DOJ in its investigation. Subsequent to the commencement of the DOJ investigation, a number of purported class action lawsuits were filed against us and other DRAM suppliers. Sixteen cases were filed between June 21, 2002, and September 19, 2002, in the following federal district courts: one in the Southern District of New York, five in the District of Idaho and ten in the Northern District of California. Each of the federal district court cases purports to be on behalf of a class of individuals and entities who purchased DRAM directly from the various DRAM suppliers during a specified time period commencing on or after October 1, 2001. The complaints allege price-fixing in violation of the Sherman Act and seek treble monetary damages, costs, attorneys’ fees, and an injunction against the allegedly unlawful conduct. The foregoing federal district court cases were transferred to the U.S. District Court for the Northern District of California (San Francisco) for consolidated proceedings. On October 6, 2003, the plaintiffs filed a consolidated amended class action complaint. The consolidated amended complaint purports to be on behalf of a class of individuals and entities who purchased DRAM directly from the various DRAM suppliers during the period from approximately November 1, 2001 through at least June 30, 2002. The consolidated amended complaint alleges price-fixing in violation of the Sherman Act and seeks treble monetary damages, costs, attorneys’ fees, and an injunction against the allegedly unlawful conduct. 21 Eight additional cases were filed between August 2, 2002, and March 11, 2003, in the following California state superior courts: five in San Francisco County, one in Santa Clara County, one in Los Angeles County and one in Humboldt County. Each of the California state cases purports to be on behalf of a class of individuals and entities who indirectly purchased DRAM during a specified time period commencing December 1, 2001. The complaints allege violations of California’s Cartwright Act and state unfair competition law and unjust enrichment and seek treble monetary damages, restitution, costs, attorneys’ fees, and an injunction against the allegedly unlawful conduct. The foregoing California state cases were transferred to San Francisco County Superior Court for consolidated proceedings. On October 15, 2003, the plaintiffs filed a consolidated amended class action complaint. The consolidated amended complaint purports to be on behalf of a class of individuals and entities who purchased DRAM indirectly from the various DRAM suppliers during the period from November 1, 2001 through June 30, 2002. The consolidated amended complaint alleges violations of California’s Cartwright Act and state unfair competition law and unjust enrichment and seeks treble monetary damages, costs, attorneys’ fees, and an injunction against the allegedly unlawful conduct. An additional case was filed on March 16, 2004 in state court in Salem, Massachusetts. It purports to be on behalf of a class of individuals and entities who indirectly purchased DRAM in Massachusetts between November 1, 2001 and June 30, 2002. The complaint alleges unjust enrichment relating to the sale and pricing of DRAM products and seeks an unspecified amount of restitution. We are unable to Depressed pricing for semiconductor memory products may lead to future losses and inventory write-downs. We recorded inventory write-downs aggregating $307.0 million in 2003, $376.1 million in 2002 and $726.9 million in 2001 as a result of the significant decreases in average selling prices for our semiconductor memory products. If average selling prices are below our costs in future periods, we would expect to incur losses on product sales and our business, results of operations or financial condition could be materially adversely affected. New product development may We are developing new products that complement our traditional memory products or leverage their underlying design or process technology. We anticipate expending significant resources for new semiconductor product development over the next several years. There can be no assurance that our product development efforts will be successful, that we will be able to cost-effectively manufacture these new products, We face risks associated with our international sales and operations that could materially adversely affect our business, results of operations Sales to customers outside the United States approximated • currency exchange rate fluctuations, • export duties, changes to import and export regulations, and restrictions on the transfer of funds, • political and economic instability, • problems with the transportation or delivery of our products, • issues arising from cultural or language differences and labor unrest, 22 • longer payment cycles and greater difficulty in collecting accounts receivable, and • compliance with trade and other laws in a variety of jurisdictions. These factors may materially adversely affect our business, results of operations If our manufacturing process is disrupted, our business, results of operations We manufacture products using highly complex processes that require technologically advanced equipment and continuous modification to improve yields and performance. Difficulties in the manufacturing process can reduce yields or disrupt production and may increase our per megabit manufacturing costs. From time to time, we have experienced minor disruptions in our manufacturing process as a result of power outages. If production at a fabrication facility is disrupted for any reason, manufacturing yields may be adversely affected or we may be unable to meet our customers’ requirements and they may purchase products from other suppliers. This could result in a significant increase in manufacturing costs or loss of revenues or damage to customer Disruptions in our supply of raw materials could materially adversely affect our business, results of operations Our operations require raw materials that meet exacting standards. We generally have multiple sources of supply for our raw materials. However, only a limited number of suppliers are capable of delivering certain raw materials that meet our standards. Various factors could reduce the availability of raw materials such as silicon wafers, photomasks, chemicals, gases, lead frames and molding compound. Shortages may occur from time to time in the future. In addition, any transportation problems could delay our receipt of raw materials. Lead times for the supply of raw materials have been extended in the past. If our supply of raw materials is disrupted or our lead times extended, our business, results of operations If we fail to achieve certain milestones, we could be obligated to pay Intel Corporation amounts up to $135 million. In conjunction with the issuance of stock rights to Intel in September 2003, we agreed to achieve operational objectives through May 2005, including certain levels of DDR2 production and 300 mm wafer processing capacity, and dedication of resources to advanced product development. If we fail to achieve certain 2005 milestones and our common stock price is then below Intel’s purchase price of $13.29, we could be obligated to pay Intel amounts up to $135 million, a substantial portion of which is payable, at our election, in our common stock. Products that do not meet specifications or that contain, or are perceived by our customers to contain, defects or that are otherwise incompatible with end uses could impose significant costs on us or otherwise materially adversely affect our business, results of operations Because the design and production process for semiconductor memory is highly complex, it is possible that we may produce products that do not comply with customer specifications, contain defects or are otherwise incompatible with end uses. If, despite design review, quality control and product qualification procedures, problems with nonconforming, defective or incompatible products occur after we have shipped such products, we could be adversely affected in the following ways: • we may • we may encounter adverse publicity, which could cause a decrease in sales of our products. 23 We expect to make future acquisitions where advisable, which involve numerous risks. We expect to make future acquisitions where we believe it is advisable to enhance our market position. Acquisitions involve numerous risks, including: • increasing our exposure to changes in average selling prices for semiconductor memory products, • difficulties in integrating the operations, technologies and products of the acquired companies, • increasing capital expenditures to upgrade and maintain facilities, • increasing debt to finance any acquisition, • diverting management’s attention from normal daily operations, • managing larger operations and facilities and employees in separate geographic areas, and • hiring and retaining key employees. Mergers and acquisitions of high-technology companies are inherently risky, and future acquisitions may not be successful and may materially adversely affect our business, results of operations 24 Item 3. Quantitative and Qualitative Disclosures about Market Risk Interest Rate Risk Substantially all of the Company’s investments All of the Company’s debt is at fixed interest rates; therefore, the fair value of the debt fluctuates based on changes in market interest rates. The Foreign Currency Exchange Rate Risk The functional currency for substantially all of the Company’s operations is the U.S. dollar. The Company held aggregate cash and other assets in foreign currency valued at Item 4. Controls and Procedures 25 Item 1. Legal Proceedings On On June 17, 2002, the Company received a grand jury subpoena from the U.S. District Court for the Northern District of California seeking information regarding an investigation by the Antitrust Division of the Department of Justice (the “DOJ”) into possible antitrust violations in the “Dynamic Random Access Memory” or “DRAM” industry. The Company is cooperating fully and actively with the DOJ in its investigation. Subsequent to the commencement of the DOJ investigation, a number of purported class action lawsuits were filed against the Company and other DRAM suppliers. Sixteen cases were filed between June 21, 2002, and September 19, 2002, in the following federal district courts: one in the Southern District of New York, five in the District of Idaho and ten in the Northern District of California. Each of the federal district court cases purports to be on behalf of a class of individuals and entities who purchased DRAM directly from the various DRAM suppliers during a specified time period commencing on or after October 1, 2001. The complaints allege price-fixing in violation of the Sherman Act and seek treble monetary damages, 26 The foregoing federal district court cases District of California (San Francisco) for (See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Certain Factors.”) Item 6. Exhibits and Reports on Form 8-K (a) The following are filed as a part of this report: Exhibit Description of Exhibit 3.1 Restated Certificate of Incorporation of the Registrant (1) 3.7 Bylaws of the Registrant, as amended (2) Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (1) Incorporated by reference to Quarterly Report on Form 10-Q for the fiscal quarter ended May 31, 2001 (2) Incorporated by reference to Quarterly Report on Form 10-Q for the fiscal quarter ended May 29, 2003 27 (b) The registrant filed the following reports on Form 8-K during the fiscal quarter ended Date Item Item SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Micron Technology, Inc. (Registrant) Dated: /s/ W. G. Stover, Jr. W. G. Stover, Jr., Vice President of Finance and 29
Carrying
Amount
Amortization
Carrying
Amount
AmortizationDuring the first nine months ofAugust 28, 2003 the Company expended $25.8 million for product
Amount
Amortization
Amount
Amortization and $2.5 million for other intangible assets with weighted average useful lives of ten and three years, respectively. During the first nine months of 2002, the Company expended $44.5 million for product and process technology and $9.3 million for other intangible assets with weighted average useful lives of eight and five years, respectively. As part of a restructure plan announced in the second quarter of 2003, the Company wrote off $16.1 million of product and process technology and $2.5 million of other intangible assets associated with discontinued products. (See “Restructure and Other Charges” note.)The Company has guaranteed a portion of the credit facility of its joint$TECH Semiconductor Singapore Pte. Ltd. (“TECH”). In accordance with FASB Interpretation No. 45, the Company estimated the fair value of its guarantee of TECH’s credit facility to be $7.0 million, which was recorded in other noncurrent liabilities in the third quarter of 2003 with an offsetting amount as an increase in the value of the TECH supply arrangement. The amount recorded pursuant to Interpretation No. 45 is being amortized using the straight-line method through the June 2006 term of the new TECH credit facility. (See “Joint Venture” note.)arrangementAmortization expense for intangible assets was $12.7 million and $38.3 million for the third quarter and first nine months of 2003, respectively, and $12.1 million and $34.6 million for the third quarter and first nine months of 2002, respectively. Annual amortization expense for intangible assets held as of May 29, 2003, is estimated to be $51.0 million for 2003, $48.1 million in 2004, $44.9 million in 2005, $43.2 million in 2006 and $41.4 million in 2007.105.0ContingenciesAs is typical in the semiconductor and other high technology industries, from time to time, others have asserted, and may in the future assert, that the Company’s products or its processes infringe their product or process technology rights. The Company is currently engaged in litigation with Rambus, Inc. (“Rambus”(31.2 relating to certain patents of Rambus and certain of the Company’s claims and defenses. Lawsuits between Rambus and the Company are pending in the United States, Germany, France, the United Kingdom and Italy. The Company is unable to predict the outcome of the Rambus suits or of other assertions of infringements made against the Company. A court determination that the Company’s manufacturing processes or products infringe the product or process rights of others could result in significant liability and/or require the Company to make material changes to its products and/or manufacturing processes. Any of the foregoing results could have a material adverse effect on the Company’s business, results of operations or financial condition.710.9On June 17, 2002, the Company received a grand jury subpoena from the U.S. District Court for the Northern District of California seeking information regarding an investigation by the Antitrust Division of the Department of Justice (the “DOJ”(6.8 into possible antitrust violations in the “Dynamic Random Access Memory” or “DRAM” industry. The Company is cooperating fully and actively with the DOJ in its investigation. Subsequent to the commencement of the DOJ investigation, twenty-four purported class action lawsuits were filed against the Company and other DRAM suppliers in various federal and state courts alleging violations of the Federal Sherman Antitrust Act or California’s Cartwright Antitrust Act and Unfair Competition Law relating to the sale and pricing of DRAM products. The complaints seek treble damages for the alleged damages sustained by purported class members, in addition to restitution, costs and attorneys’ fees, as well as an injunction against the allegedly unlawful conduct. The Company is unable to predict the outcome of these suits. Based upon the Company’s analysis of the claims made and the nature of the DRAM industry, the Company believes that class treatment of these cases is not appropriate and that any purported injury alleged by plaintiffs would be more appropriately resolved on a customer-by-customer basis. There can be no assurance that the final resolution of these alleged violations of federal or state antitrust laws will not result in significant liability and will not have a material adverse effect on the Company’s results of operations and financial condition.The Company has accrued a liability and charged operations for the estimated costs of adjudication or settlement of asserted and unasserted claims existing as of the balance sheet date. The Company is currently a party to various other legal actions arising out of the normal course of business, none of which is expected to have a material adverse effect on the Company’s results of operations or financial condition.(8.8In the normal course of business, the Company is a party to a variety of agreements pursuant to which it may be obligated to indemnify the other party. It is not possible to predict the maximum potential amount of future payments under these types of agreements due to the conditional nature of the Company’s obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the Company under these types of agreements have not had a material effect on the Company’s results of operations or financial condition.
2004
2003
2004
2003
2004
2003Contingencies
Redeemable Common Stock
issuanceCompany’s acquisition on April 22, 2002, of substantially all of the assets of Toshiba Corporation’s (“Toshiba”) DRAM business as conducted by Dominion Semiconductor L.L.C., the Company issued Toshiba 1.5 million shares of common stock for the Toshiba DRAM Acquisition, the Companyand granted Toshiba Corporation (“Toshiba”) an option to require the Company to repurchase on October 21, 2003, all of thesethe shares for $67.5 million in cash. Thecash on October 21, 2003. During the first quarter of 2004, Toshiba exercised its option expires ifand the closing priceCompany redeemed the 1.5 million shares.Stock Rights
stock is at or above $45.05 per share for 20 consecutive trading days. The carrying valuestock. In conjunction with the issuance of the redeemablestock rights, the Company agreed to achieve operational objectives through May 2005, including certain levels of DDR2 production and 300 mm wafer processing capacity, and dedication of resources to advanced product development. In the event the Company fails to achieve certain 2005 milestones and the Company’s common stock price is accretedthen below Intel’s purchase price of $13.29, the Company could be obligated to its redemption amountpay Intel amounts not to exceed $135 million, a substantial portion of $67.5 million by a charge directlywhich is payable, at the Company’s election, in the Company’s common stock. The shares issuable pursuant to retained earnings and isthe stock rights are included in weighted average common shares outstanding in the computations of earningearnings per share. Accretion of redeemable common stock was $1.6 million and $4.7 million in the third quarter and first nine months of 2003, respectively, and was $0.6 million for both the third quarter and first nine months of 2002, respectively. (See “Acquisition of Toshiba Corporation DRAM Assets” note.)Income TaxesThe income tax provision for the third quarter and first nine months of 2003 was $23.9 million and $62.9 million, respectively, which primarily reflects taxes on foreign operations. Income tax benefit for the third quarter and first nine months of 2002 was $16.1 million and $213.6 million, respectively. The Company recognized no tax benefit on its domestic net operating losses in 2003.As of May 29, 2003, the Company had aggregate U.S. tax net operating loss carryforwards of $2,561.0 million and unused U.S. tax credits of $90.4 million, which expire in various years through 2023. The Company also has state tax net operating loss carryforwards of $1,818.9 million which expire through 2023 and unused state tax credits of $127.8 million which expire through 2017.8Earnings (Loss) Per ShareBasic earnings per share is computed based on the weighted average number of common shares outstanding. Diluted earnings per share is computed based on the weighted average number of common shares outstanding plus the dilutive effects of stock options, stock warrants and convertible notes. Potential common shares that would increase earnings per share amounts or decrease loss per share amounts are antidilutive and are therefore excluded from earnings per share calculations. The potential common shares that were antidilutive for the third quarter and first nine months of 2003 amounted to 125.0 million shares and 124.9 million shares, respectively, and for the third quarter and first nine months of 2002 amounted to 109.3 million shares and 107.9 million shares, respectively. Basic and diluted earnings per share computations reflect the effect of accretion of redeemable common stock.
2003
2002
2003
2002Stock-Based CompensationThe Company accounts for its employee stock plans using the intrinsic value method prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.” The following presents pro forma loss and per share data as if a fair value-based accounting method (using the Black-Scholes option valuation model) had been used to account for stock-based compensation:
2003
2002
2003
20029Comprehensive Income (Loss)Comprehensive loss for the third quarter and first nine months of 2003 was $215.0 million and $1,150.7 million, respectively, and included $0.1 million and $0.7 million net of tax, respectively, of unrealized losses on investments. Comprehensive loss for the third quarter and first nine months of 2002 was $24.0 million and $316.6 million, respectively, and included $0.2 million and $3.9 million of unrealized gains net of tax, respectively, on investments.Restructure and Other Charges
As a result of the prolonged downturn in the semiconductor memory industry and the Company’s successive quarters of operating losses, inIn the second quarter of 2003, the Company announced a plan to restructure its operations. The restructure plan included the shutdown of the Company’s 200 mm production line in Virginia, the discontinuance of certain memory products, including SRAM and TCAM products, and aan approximate 10% reduction of the Company’s worldwide workforce. In connection with the plan, the Company’s results of operations includedCompany recorded a $107.9 million restructure charge of $102.5 million in the first nine months of 2003. In addition, the Company recorded other restructure-relatedand additional restructure related charges of $7.1$7.8 million, to write-down the carrying value of raw materials and work-in-process inventories associated with discontinued products. These other charges arewhich is included in cost of goods sold, in the accompanying consolidated statementssecond quarter of operation.2003. The Company expectscredit to substantially completerestructure of $21.2 million in the restructure plan by the endfirst six months of 2003 and estimates that it will incur additional restructure charges of approximately $15 million over the next several quarters,2004 primarily for the redeploymentreflects gains on sales of equipment from its Virginia site to other facilities. The componentsassociated with operations shut down in the restructure. Through March 4, 2004, the Company has paid essentially all of the restructure and other charges were as follows:
ended
February
27, 2003
charges as
of May 29,
2003Through May 29, 2003, the Company had paid $25.4 million of the severance and other termination costs and $0.7 million of other costs. As of May 29, 2003, the Company’s accounts payable and accrued expenses included $5.0 million for remaining costs accrued in connection with the restructure plan.Acquisition of Toshiba Corporation DRAM AssetsOn April 22, 2002,plan but expects to incur gains and losses in future periods as residual equipment associated with the Company acquired substantially allrestructure is sold. The components of the assetsrestructure charge and additional restructure related charges in the second quarter of Toshiba Corporation’s (“Toshiba”) DRAM business2003 are as conducted by Dominion Semiconductor L.L.C., a wholly-owned subsidiary of Toshiba located in Virginia (the “Toshiba DRAM Acquisition”). The total purchase price of $327.9 million included cash and 1.5 million shares of the Company’s common stock, which was valued at $58.1 million on the date of acquisition. The purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values. In connection with the purchase, the Company recorded total assets of $363.3 million, including property, plant andfollows:108
February 27, 2003equipmentOther Operating (Income) Expense
$292.82004 includes a $7.6 million benefit from changes in currency exchange rates primarily as the result of a generally stronger U.S. dollar relative to the Japanese yen and euro. For the first six months of 2004, the Company recognized a net loss of $16.9 million from changes in currency exchange rates as gains in the second quarter of 2004 only partially offset $24.5 million of losses from changes in the first quarter of 2004. Other operating expense for the first six months of 2004 includes net gains of $8.0 million related to disposals of semiconductor equipment. Other operating expense in the second quarter and first six months of 2003 includes losses of $13.5 million and intangible assets$9.1 million, respectively, from changes in currency exchange rates. Other operating expense in the first six months of $7.82003 also includes net losses of $10.8 million related to disposals of semiconductor equipment. Other operating income in the second quarter of 2003 includes $14.4 million in receipts from the U.S. government in connection with anti-dumping tariffs.Income Taxes
Earnings (Loss) Per Share
2004
2003
2004
2003Comprehensive Income (Loss)
total liabilities$935.7 million, respectively, and included $1.0 million and $0.6 million net of $35.4 million. (See “Redeemable Common Stock” note.)tax, respectively, of unrealized losses on investments.Joint Venture
$77.5$124.8 million and $225.0$247.9 million for the thirdsecond quarter and first ninesix months of 2003,2004, respectively, and $55.2$86.9 million and $77.5$147.5 million for the thirdsecond quarter and first ninesix months of 2002,2003, respectively. Amortization expense resulting from the TECH supply arrangement, included in the cost of products purchased from TECH, was $2.4 million and $7.2$5.0 million for the thirdfirst quarter and first ninesix months of 2003,2004, respectively, and $2.6$2.4 million and $7.7$4.8 million for the thirdsecond quarter and first ninesix months of 2002,2003, respectively. Receivables from TECH were $33.8$28.2 million and payables to TECH were $54.2$64.4 million as of May 29, 2003.March 4, 2004. Receivables from TECH were $10.5$53.1 million and payables to TECH were $52.8$102.5 million as of August 29, 2002.28, 2003. As of March 4, 2004, the Company had remaining unamortized costs of $67.8 million in intangible assets relating to the supply arrangement to purchase product from TECH.In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” Interpretation No. 45 requires an entity, at the time it issues a guarantee, to recognize an initial liability for the fair value of obligations assumed under the guarantee and elaborates on existing disclosure requirements. On March 13, 2003, TECH refinanced its then existing credit facility by entering into a new $250The Company has pledged $100.0 million credit facility. In connection therewith, $50.0 million previously pledged by the Company as cash collateral with respect tofor TECH’s $250.0 million credit facility was re-pledged and supplemented with an additional $50.0 million.facility. In the event the cash collateral is used to discharge obligations of TECH that are unpaid and due under the TECH credit facility, certain shareholders of TECH have agreed to indemnify the Company for approximately one-half of the amount of the cash collateral used to satisfy such obligations. In accordance with Interpretation No. 45, the Company estimated the fair value of its guarantee of TECH’s credit facility to be $7.0 million, which was recorded in other noncurrent liabilities in the third quarter of 2003 with an offsetting amount recorded as an addition to the value of the TECH supply arrangement. The amount recorded pursuant to Interpretation No. 45 is being amortized using the straight-line method through the June 2006 term of the new TECH credit facility.1110Micron Technology, Inc., and its subsidiaries (hereinafter referred to collectively as the “Company”) principally design, develop, manufacture and market semiconductor products.“Critical Accounting Policies – Income Taxes”“Net Sales” regarding future megabit production growth and “Income Taxes” regarding taxes from the Company foreign operations; inallocation of wafer starts to DDR2 devices, CMOS image sensors, PSRAM devices and Flash memory products, “Gross Margin” regarding the estimated amount of write-down remainingmanufacturing cost reductions in inventory at the end of the fourth quarter of 2003future periods and relative gross marginsmargin realized on products purchased from TECH products in the fourththird quarter of 2003;2004; in “Research and Development” regarding the level of expected research and development expenses related toin the Company’s 300 mm production line; in “Restructure and Other Charges” regarding timing and additional costs to complete the restructure and the estimated cost savings in future periodsthird quarter of 2004 and in “Liquidity and Capital Resources” regarding capital spending in 2003 and 2004. The Company’s actual results could differ materially from the Company’s historical results and those discussed in the forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, those identified in “Certain Factors.” This discussion should be read in conjunction with the Consolidated Financial Statements and accompanying notes and with the Company’s Annual Report on Form 10-K for the year ended August 29, 2002.28, 2003. All period references are to the Company’s fiscal periods unless otherwise indicated. The Company’s fiscal year is the 52 or 53-week period ending on the Thursday closest to August 31. The Company’s fiscal 2004, which ends on September 2, 2004, contains 53 weeks. All per share amounts are presented on a diluted basis. All tabular dollar amounts are in millions.Critical Accounting PoliciesThe preparation of financial statements and related disclosures in conformity with United States generally accepted accounting principles (“U.S. GAAP”) requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. Estimates and judgments are based on historical experience, forecasted future events and various other assumptions that the Company believes to be reasonable under the circumstances. Estimates and judgments may vary under different assumptions or conditions. The Company evaluates its estimates and judgments on an ongoing basis. Management believes the accounting policies below are critical in the portrayal of the Company’s financial condition and results of operations and require management’s most difficult, subjective or complex judgments.Income taxes: OverviewThe Company has recorded a valuation allowance against its deferred tax assets arising from net operating loss carryforwards of its domestic operations. The Company expects that until it utilizes these operating loss carryforwards the consolidated income tax provision will only reflect taxes from the Company’s foreign operations. The Company evaluates the realizability of its deferred tax assets on an ongoing basis in accordance with U.S. GAAP, which requires the assessment of the Company’s performance and other relevant factors when determining the need for a valuation allowance with respect to these deferred tax assets. The Company’s ability to realize deferred tax assets is dependent on the level of future taxable income being sufficient to utilize loss carryforwards or tax credits before their expiration. In the evaluation of realizability of deferred tax assets, factors such as recent losses are given substantially more weight than forecasted future profitability.requireda global manufacturer and marketer of DRAM, Flash memory, CMOS image sensors and other semiconductor components. These semiconductor components are similar to estimate its provision for income taxescommodities in that they are generally standardized products where selling prices fluctuate significantly based upon industry-wide relationships of supply and amounts ultimately payable or recoverabledemand. Success in numerous jurisdictions around the world. Such estimates involve interpretationssemiconductor memory market is typically driven by achieving the most cost-efficient delivery of regulations and are inherently complex. Resolutionproducts. Delivery of income tax treatments in individual jurisdictions may not be known for many years after completion of any fiscal year.Inventories: Inventories are statedsemiconductor memory products at the lower of averagelowest cost or market value. Cost includes labor, material and overhead costs, including productis dependent upon advanced design and process technology, costs. Determining market valueefficient utilization of inventories involves numerous judgments including projecting average selling pricesextensive capital investments in silicon processing capacity, timely development of new products and sales volumes for future periods and costs to complete products in work in process inventories. To project average selling prices and sales volumes, the Company reviews recent sales volumes, existing customer orders, current contract prices, industry analysis of supply and demand, seasonal factors, general economic trends and other information. When these analyses reflect estimated market values below the Company’s costs, the Company records a charge to cost of goods sold in advance of when the inventory is actually sold. Differences in forecasted average selling prices used in calculating lower of cost or market adjustments can result in significant changes in the estimated net realizable value of productcost-effective capital access.12inventories and accordingly the amount of write-down recorded. Due to the volatile nature of the semiconductor memory industry, actual selling prices and volumes often vary significantly from projected prices and volumes and as a result, the timing of when product costs are charged to operations can vary significantly. For example, a 5% variance in the estimated average selling prices would have changed the estimated fair value of the Company’s inventory by $29 million at the end of the third quarter of 2003.U.S. GAAP provides for products to be grouped into categories in order to compare costs to market values. The amount of any inventory write-down can vary significantly depending on the determination of inventory categories. A majority of the Company’s inventory has been categorized as volatile (primarily DRAM) or non-volatile (Flash). The major characteristics the Company considers in determining inventory categories are product type and markets.Product and process technology: Costs incurred to acquire product and process technology or to patent technology developed by the Company are capitalized and amortized on a straight-line basis over periods currently ranging up to 10 years. The Company capitalizes a portion of costs incurred based on its analysis of historical and projected patents issued as a percent of patents filed. Capitalized product and process technology costs are amortized over the shorter of (i) the estimated useful life of the technology, (ii) the patent term or (iii) the term of the technology agreement.Property, plant and equipment: The Company reviews for impairment the carrying value of property, plant and equipment when events and circumstances indicate that the carrying value of an individual asset or groups of assets may not be recoverable from the estimated future cash flows expected to result from their use and/or disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the estimated fair value of the assets. The estimation of future cash flows involves numerous assumptions which require judgment by the Company, including, but not limited to, future use of the assets for Company operations versus sale or disposal of the assets, future selling prices for the Company’s products and future sales and production volumes.Research and development: Costs related to the conceptual formulation and design of products and processes are expensed as research and development when incurred. Determining when product development is complete requires judgment by the Company. The Company deems development of a product complete once the product has been thoroughly reviewed and tested for performance and reliability and is internally qualified for sale to customers. Subsequent to product qualification, product costs are valued in inventory.Contingencies: The Company is subject to the possibility of various loss contingencies. Considerable judgment is necessary to estimate the probability and amounts of such contingencies. An accrual is made when it is probable that a liability has been incurred or an asset has been impaired and the amount of loss can be reasonably estimated. The Company accrues a liability and charges operations for the estimated costs of adjudication or settlement of asserted and unasserted claims existing as of the balance sheet date. The Company regularly evaluates current information available to determine whether such accruals should be adjusted.
sales
sales
sales
sales
sales
sales
sales
sales
salesOn February 18, 2003, the Company announced a series of cost-reduction initiatives including the shut-down of its 200 mm wafer fabrication line in Virginia, the discontinuance of certain product lines and a 10% reduction in its worldwide workforce. In connection with its restructure plan, the13Company’s results of operations for the first nine months of 2003 include a restructure charge of $103 million and other restructure-related charges of $7 million, which are included in cost of goods sold to write down the carrying value of raw materials and work in process inventories associated with discontinued products. (See “Restructure and Other Charges” and “Item 1. Financial Statements – Notes to Consolidated Financial Statements – Restructure and Other Charges.”)lossincome (loss) absent the inventory write-downs and the estimated aggregate effects of previous write-downs and restructure and related charges. These adjusted amounts have not been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”), however the Company believes this information may be useful in assessing the effects of inventory write-downs and the restructure and related charges on the Company’s operating lossresults and analyzing the Company’s operating loss trends.
2003
2003The Company acquired the assets of Toshiba Corporation’s (“Toshiba”) DRAM operations at Dominion Semiconductor L.L.C. in Virginia on April 22, 2002. The Company’s results of operations for the third quarter and first nine months of 2002 include results from these acquired operations after the acquisition date. The total purchase price of $328 million included cash and 1.5 million shares of the Company’s common stock. Toshiba has an option to require the Company to repurchase on October 21, 2003, all of these shares for $68 million in cash. (See “Item 1. Financial Statements – Notes to Consolidated Financial Statements – Redeemable Common Stock, and Acquisition of Toshiba Corporation DRAM Assets.”)thirdsecond quarter of 20032004, a 13-week quarter, decreased by 7%10% as compared to the first quarter of 2004, a 14-week quarter, primarily due to a 13% decrease in megabits of semiconductor memory sold as average per megabit selling prices for the Company’s memory products were relatively unchanged. In the second quarter of 2004, the Company achieved gains in manufacturing efficiencies principally due to improved product yields and the continuing transition of production to devices utilizing 110 nanometer (“nm”) process technology and the Company’s 6f² technology, which can produce approximately 20% more potential die per wafer than standard products, which use 8f² technology. Increases in megabit production from manufacturing efficiencies were largely offset by an increase in the allocation of wafer starts to CMOS image sensors and certain lower density memory products. Future megabit production growth is expected to be negatively affected by an increased allocation of wafers to the manufacture of DDR2 devices, which have a relatively larger die size, CMOS image sensors, PSRAM devices and Flash memory products. The Company expects to allocate approximately 20% of its total wafer starts to CMOS image sensors, PSRAM devices and Flash memory products by the end of calendar 2004. For the second quarter of 2004, megabit production was slightly higher than megabit sales. Finished goods inventories at the end of the quarter remained at relatively low levels. DDR products constituted 71% of the Company’s megabits sold in the second quarter of 2004 and 75% of megabits sold in the first quarter of 2004.asprimarily due to a result of a 16% decrease in average selling prices for the Company’s semiconductor memory products partially offset by a 10%20% increase in megabits of memory sold. The decreaseMegabits produced in average selling prices reflects the net effectsecond quarter of continued declines in2004 increased 34% as compared to the second quarter of 2003 principally due to increased manufacturing efficiencies. Average selling prices for the Company’ssecond quarter of 2004 increased by 4% as compared to the second quarter of 2003. DDR SDRAM products partially offset by increases in the average selling prices for the Company’s SDRAM products. DDR SDRAM products constituted approximately 65%62% of the Company’s megabits sold in the thirdsecond quarter of 2003. Megabit production volume increased approximately 20% in the third quarter of 2003 compared to the second quarter principally due to the Company’s migration to ..13µ and .11µ process technology and improved manufacturing yields. Megabits of memory sold in the third quarter of 2003 slightly outpaced production resulting in lower levels of finished goods inventories.the third quarterfirst six months of 2003 decreased2004 increased by 5%43% as compared to the third quarterfirst six months of 2002,2003 primarily due to a 52% decrease in average selling prices offset by a 94%39% increase in megabits of memory sold. Net sales forMegabits produced in the first ninesix months of 20032004 increased by 20%43% as compared to the first ninesix months of 2002, primarily2003 principally due to a 43% increase in megabits sold partially offset by a 17% decrease in averageincreased manufacturing efficiencies. Average selling prices.prices for the Company’s product were relatively unchanged for the first six months of 2004 as compared to the first six months of 2003.has been significantly affectedpercentage for the second quarter of 2004 was approximately the same as for the first quarter of 2004 as average selling prices and average costs per megabit were relatively unchanged. Reported gross margin for the second quarter of 2004 decreased $37.8 million from the first quarter of 2004 primarily due to lower margins realized from the sale of products purchased from TECH. The Company achieved per megabit cost reductions in the second quarter of 2004 from improved product yields and its continuing transition to devices utilizing 110 nm process technology and the Company’s 6f² technology. The cost reductions from manufacturing efficiencies in the second quarter of 2004 were largely offset by a shift in product mix to lower density memory products that have higher costs per megabit than the Company’s primary DRAM products. The Company expects to reduce its manufacturing costs in future periods from increased shipments of devices utilizing the Company’s advanced process technology, improved manufacturing yields and transition to higher density products. Per megabit cost reductions in the near term will be limited by the timingincreased production of DDR2 devices, CMOS image sensors, PSRAM devices and Flash memory products; certain lower density memory products and higher costs associated with the limited volumes of production at the Company’s 300 mm manufacturing facility in Virginia. In recent periods, average selling prices forCompany’s semiconductor products have been below manufacturing costs, and accordingly the Company’s resultscarrying value of operations, cash flows and financial condition have been adversely affected.its inventories to their estimated market values. If the estimated market values of products held in finished goods and work in process inventories at a quarter end date are below the Company’s manufacturing cost of these products, the Company recognizes a charge to cost of goods sold to write down the carrying value of inventories to their estimated market values. In each of the last nine quarters, the Company recorded charges to cost of goods sold to write down the carrying value of its inventories to their14estimated market values.values as required by U.S. GAAP. As these charges are recorded in advance of when inventory subject to the write-down is sold, gross margins in the period of sale are higher than they would be absent the effect of the previous write-downs. No write-down was necessary for the second or first quarter of 2004. Previous write-downs of inventories prior to 2004 are not expected to have a significant effect on operating results in future periods.aggregate effectsnet effect of previous write-downs. These adjusted amounts have not been prepared in accordance with generally accepted accounting principles,U.S. GAAP, however the Company believes this information may be useful in assessing the effects of inventory write-downs on the Company’s gross margin and analyzing the Company’s gross margin trends.
net sales
net sales
net sales
net sales
net sales
sales
sales
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salesThe Company’s reported gross margin for the third quarter of 2003 improved as compared to the second quarter of 2003, primarily due to the net effects of current and previous period inventory write-downs and a decrease in per megabit manufacturing costs, partially offset by the 16% decrease in average selling prices for the Company’s semiconductor memory products. The Company was able to significantly reduce per megabit manufacturing costs through gains in manufacturing efficiency achieved in the third quarter of 2003. During the third quarter of 2003, the Company substantially completed its transition to .13µ technology and continued to migrate to .11µ technology.The Company’s gross margin for the third quarter of 2003 decreased as compared to the third quarter of 2002, primarily due to the 52% decrease in average selling prices, partially offset by a decrease in per megabit manufacturing costs due to manufacturing efficiency gains and the net effects of current and previous period inventory write-downs.The Company’s gross margin for the first nine months of 2003 decreased as compared to the first nine months of 2002, primarily due to the 17% decrease in average selling prices and the net effects of current and previous period inventory write-downs. Absent the effects of inventory write-downs, the gross margin for the first nine months of 2003 improved as compared to the first nine months of 2002, primarily due to a decrease in per megabit manufacturing costs, partially offset by the decrease in average selling prices and charges aggregating $19 million for write-downs of discontinued products and obsolescence charges for older EDO DRAM products.Of the cumulative inventory write-downs recognized in the last nine quarters, the Company estimates that approximately $130 million is associated with product remaining in inventory as of May 29, 2003. The Company estimates that approximately half of this amount will remain in inventory at the end of 2003.Subject to specific terms and conditions, the Company has agreed to purchase all of the products manufactured by its joint venture memory manufacturing operation, TECH Semiconductor Singapore Pte. Ltd. (“TECH”).: The TECH joint venture supplied approximately 30% of the total megabits of memory produced by the Company in the third quartersecond and first nine monthsquarters of 20032004 and supplied approximately 20% in the thirdsecond quarter and first nine months of 2002.2003. The Company generally purchases semiconductormemory products from TECH at prices determined quarterly, based on a discount from average selling priceprices realized by the Company for the immediately preceding quarter. The Company performs assembly and test services on products manufactured by TECH. The Company also provides certain technology, engineering, and training support to TECH. All of these transactions with TECH are recognized as part of the net cost of products purchased from TECH.15TheIn the second quarter of 2004 the gross margin percentages realized by the Company on sales of TECH products were approximately the same as gross margins realized significantlyon products manufactured by its wholly-owned facilities. Per unit costs of products purchased from TECH were higher in the second quarter of 2004 than in the first quarter of 2004 due to the quarter-lag pricing and changes in product mix. In the first quarter of 2004, second quarter of 2003 and first six months of 2004 and 2003, the Company realized higher gross margin percentages on sales of TECH products than for products manufactured by its wholly-owned facilities in the third quarter and first nine months of both 2003 and 2002.facilities. The Company expects gross margins on sales of TECH products in the fourththird quarter of 20032004 to be higher than gross margins realized on products manufactured by the Company’s wholly-owned operations.facilities and higher than gross margins realized on sales of TECH products in the second quarter of 2004.(“SG&A”) expense was slightly lower for the third quarter of 2003 as compared to SG&A expense of $92 million forexpenses decreased 11% and 14%, respectively, in the second quarter of 2003. SG&A expense increased in the third quarter and first ninesix months of 20032004 as compared to the corresponding periods of 2002,2003 primarily due to increasedlower costs associated with outstanding legal matters. (See “Item 1. Financial Statements – Notes to Financial Statements – Contingencies.”)Product development costs are recorded as R&D expense. The Company deems development of a product complete once the product has been thoroughly reviewed and tested for performance and reliability. Because of the lead times necessary to manufacture the Company’s products, the Company typically begins to process wafers before completion of performance and reliability and is internally qualified for sale to customers.testing. R&D expenseexpenses can vary significantly depending on the timing of product qualification. Product development costs are recorded as R&D expense.2003 was $162 million, representing a 7% decrease2004 are expected to remain at approximately the same level as compared to R&D expense of $174 million in the second quarter of 2003. R&D expense for the third quarter of 2003 was lower than projected due to the earlier qualification of the Company’s ..11µ DDR SDRAM devices than had been predicted. R&D expenses related to the Company's 300 mm production line are expected to decline in the first quarter of 2004, after initial product qualifications occur.2004.DRAM process technology research and developmentR&D efforts are focused primarily on its .11µdevelopment of 110 nm, 95 nm and .095µsmaller line-width process technologies, which are designed to facilitate the Company’s transition to next generation products. Additional process development work includesR&D efforts include processes to support 300 mm wafer manufacturing, CMOS image sensors, Flash CMOS imagers,memory products, and new memory materials. In addition to its process technology efforts, the Company continues to emphasize product designs that utilize advanced process technology.manufacturing materials such as copper. Efforts towardstoward the design and development of new products are concentrated on the Company’s 512 Meg and 1 Gig DDR, SDRAMs, DDRII SDRAMsDDR2 and GDDRIII SDRAMs,other DRAM products, including PSRAM and reduced latency DRAM (“RLDRAM”), as well as Flash memory products,and CMOS imagers and certain advanced DRAM technologyimage sensor products.Company’s successive quarters ofresulting operating losses, in the second quarter of 2003 the Company announced a plan to restructure its operations. The restructure plan included the shutdown of the Company’s 200 mm production line in Virginia, the discontinuance of certain memory products, including SRAM and TCAM products, and aan approximate 10% reduction of the Company’s worldwide workforce. In connection with the plan, the Company’s results of operations includedCompany recorded a $107.9 million restructure charge of $103 million in the first nine months of 2003. In addition, the Company recorded otherand additional restructure-related charges of $7$7.8 million to write-down the carrying value of raw materials and work-in-process inventories associated with discontinued products. These other charges are included in cost of goods sold in the accompanying consolidated statementssecond quarter of operation.2003. The credit to restructure of $21.2 million in the first six months of 2004 primarily reflects gains on sales of equipment associated with operations shut down in the restructure. Higher equipment sales prices reflect improved market conditions across the semiconductor industry. The Company expects tohas substantially completecompleted the restructure plan bybut expects to record gains and losses in future periods as residual equipment associated with the end of 2003 and estimates that it will incur additional restructure charges of approximately $15 million over the next several quarters, primarily for the redeployment of equipment from its Virginia site to other facilities.is sold. The components of the restructure charge and otheradditional restructure related charges werein the second quarter of 2003 are as follows:
February 27, 200316
ended
February
27, 2003
charges as
of May 29,
2003Through May 29, 2003, the Company had paid $25 million of the severance and other termination costs and $1 million of other costs. As of May 29, 2003, the Company’s accounts payable and accrued expenses included $5 million for remaining costs accrued in connection with the restructure plan.The Company expects its restructuring efforts to result in a lower overall cost structure, to provide better focus on products with greater potential for growth and profitability and to allow continuing investment in new technology. The Company expects to realize annualized cost savings in excess of $250 million as a result of this restructure plan.Income and(Income) Expenseninequarter of 2004. The Company estimates that, based on its assets and liabilities denominated in currencies other than U.S. dollar as of March 4, 2004, a 1% change in the exchange rate versus the U.S. dollar would result in foreign currency gains or losses of approximately $2 million for the Japanese yen and $1 million for the euro. Other operating expense for the first six months of 2004 includes net gains of $8.0 million related to disposals of semiconductor equipment. Other operating expense in the second quarter and first six months of 2003 includes losses net of gains on write-downs and disposals of semiconductor equipment of $19$13.5 million and losses of $12$9.1 million, respectively, from changes in currency exchange rates. Other operating income in the first nine monthssecond quarter of 2003 includes $14$14.4 million received in the second quarter of 2003receipts from the U.S. government in connection with anti-dumping tariffs. Other operating expense in the third quarterfirst six months of 20022003 also includes net losses of $15$10.8 million from changes in currency exchange rates. Other operating expense for the first nine months of 2002 includes losses net of gains on write-downs andrelated to disposals of semiconductor equipment of $10 million.equipment.Income TaxesLiquidity and Capital Resourcesincome tax provisionCompany’s liquidity is highly dependent on average selling prices for its semiconductor memory products, which can vary significantly from period to period. As of March 4, 2004, the Company had cash and marketable investments totaling $1,211.7 million, compared to $921.8 million as of August 28, 2003.third quarteracquisition of property, plant and equipment.ninesix months of 2003 was $242004, payments on equipment purchase contracts and debt were $255.0 million. In the second quarter of 2004, the Company received $60.6 million in net proceeds from the issuance of notes payable and $63a sales-leaseback transaction. In the first quarter of 2004, the Company paid $67.5 million respectively, which primarily reflects taxes on foreign operations. Income tax benefitto Toshiba Corporation to redeem the 1.5 million shares of common stock issued in connection with the acquisition of the Company’s Virginia facility from Toshiba.thirdissuance of stock rights exchangeable into approximately 33.9 million shares of the Company’s common stock. In conjunction with the issuance of the stock rights, the Company agreed to achieve operational objectives through May 2005, including certain levels of DDR2 production and 300 mm wafer processing capacity and dedication of resources to advanced product development. In the event the Company fails to achieve certain 2005 milestones and the Company’s common stock price is then below Intel’s per share purchase price of $13.29, the Company could be obligated to pay Intel amounts not to exceed $135 million, a substantial portion of which is payable, at the Company’s election, in the Company’s common stock.and first nine months of 2002 was $162003, the Company issued $632.5 million and $214 million, respectively.of 2.5% Convertible Subordinated Notes (the “Notes”). Holders of the Notes may convert all or some of their Notes at any time prior to maturity, unless previously redeemed or repurchased, into the Company’s common stock at a conversion rate of 84.8320 shares for each $1,000 principal amount of the Notes. This conversion rate is equivalent to a conversion price of approximately $11.79 per share. The Company recognized no tax benefitmay redeem the Notes at any time after February 6, 2006, at declining premiums to par.domestic net operating losses in 2003.operations.May 29, 2003, the Company had aggregate U.S. tax netMarch 4, 2004, maturities of notes payable, future minimum lease payments under capital leases and minimum commitments under operating loss carryforwards of $2,561 million and unused U.S. tax credits of $90 million, which expire in various years through 2023. The Company also has state tax net operating loss carryforwards of $1,819 million which expire through 2023 and unused state tax credits of $128 million which expire through 2017. Until the Company utilizes these net operating loss carryforwards and unused tax credits, the income tax provision will only reflect taxes from the Company’s foreign operations.leases were as follows:Recently Issued Accounting Standards
MayDecember 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 requires that certain financial instruments, which under previous guidance could be accounted for as equity, be classified as liabilities in statements of financial condition. SFAS No. 150 is effective17for financial instruments entered into or modified after May 31, 2003, and is otherwise effective for the Company in the first quarter of 2004. The Company does not expect the adoption of SFAS No. 150 to have a significant impact on the Company’s future results of operations or financial condition.In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003. The Company does not expect the adoption of SFAS No. 149 to have a significant impact on the Company’s future results of operations or financial conditionIn January 2003, the FASB issuedrevised Interpretation No. 46, “Consolidation of Variable Interest Entities – an interpretation of ARB No. 51,” which provides guidance on the identification of and reporting for variable interest entities. Interpretation No. 46 expands the criteria for consideration in determining whether a variable interest entity should be consolidated. Interpretation No. 46 is effectively immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. Interpretation No. 46 is effective for the Company in the firstthird quarter of 2004 for variable interest entities acquired before February 1, 2003.2004. The Company is currently assessing the impactdoes not expect adoption of Interpretation No. 46 to have a significant impact on its future results of operations andor financial condition.Liquidity and Capital ResourcesCritical Accounting PoliciesAsThe preparation of May 29, 2003,financial statements and related disclosures in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. Estimates and judgments are based on historical experience, forecasted future events and various other assumptions that the Company had cashbelieves to be reasonable under the circumstances. Estimates and marketable investments totaling $1,004 million, compared to $1,146 million, which includes $160 million of investment securities with maturities of more than one year, as of August 29, 2002. Duringjudgments may vary under different assumptions or conditions. The Company evaluates its estimates and judgments on an ongoing basis. Management believes the first nine months of 2003,accounting policies below are critical in the Company received financing proceeds of $633 million from the issuance of 2.5% seven-year convertible subordinated notes and $95 million from the issuance of other debt. In conjunction with the issuanceportrayal of the notes, the Company spent $109 million to purchase call spread options. During the first nine months of 2003, the Company spent $674 million for property, plantCompany’s financial condition and equipment and $216 million for payments of equipment purchase contracts and debt. In addition, the Company received income tax refunds of $109 million in the first quarter of 2003. The Company’s liquidity is highly dependent on overall industry demand for semiconductor memory and average selling prices for its semiconductor products.The Company believes that to develop new product and process technologies, support future growth, achieve operating efficiencies and maintain product quality, it must continue to invest in manufacturing technology, facilities and capital equipment, research and development, and product and process technology. The Company expects capital spending to approximate $1.1 billion in 2003 and has spent approximately $925 million to date. The amounts included in the consolidated statement of cash flows for 2003 as equipment acquisitions on contracts payable and capital leases include $59 million related to assets sold and reacquired in equipment sale-leaseback transactions. The Company originally acquired the majority of these assets prior to 2003.The Company expects capital spending to approximate $1 billion in 2004. Capital spending estimates include expenditures for ongoing equipment upgrades and expenditures for the Company’s 300 mm production line. As of May 29, 2003, the Company had commitments extending into 2004 of approximately $275 million for the acquisition of property, plant and equipment. The Company anticipates cash expenditures of approximately $15 million over the next several quarters to complete its restructure plan.The Company has historically utilized external sources of financing to fund a portionresults of operations and since April 2000 has had a shelf registration statement in place pursuant to which the Company may from time to time issue debtrequire management’s most difficult, subjective or equity securities for up to $1 billion.complex judgments.may also seekis subject to raise funds through issuing securities not covered by the possibility of various loss contingencies. Considerable judgment is necessary to estimate the probability and amount of any loss from such contingencies. An accrual is made when it is probable that a liability has been incurred or an asset has been impaired and the amount of loss can be reasonably estimated. The Company accrues a liability and charges operations for the estimated costs of adjudication or settlement of asserted and unasserted claims existing shelf registration statement, by increasing the sizeas of the existing shelf registration statement or pursuing other external sources of financing.balance sheet date.In connection with the acquisition of the Virginia facility, the Company issued 1.5 million shares of common stock. The Company granted Toshiba an option to require the Company to repurchase on October 21, 2003, all of these shares for $68 million cash. The option expires if the closing price of the Company’s common stock is at or above $45.05 per share for 20 consecutive trading days.1816On March 13, 2003, TECH refinancedIncome taxes:The Company is required to estimate its thenprovision for income taxes and amounts ultimately payable or recoverable in numerous tax jurisdictions around the world. Estimates involve interpretations of regulations and are inherently complex. Resolution of income tax treatments in individual jurisdictions may not be known for many years after completion of any fiscal year. The Company is also required to evaluate the realizability of its deferred tax assets on an ongoing basis in accordance with U.S. GAAP, which requires the assessment of the Company’s performance and other relevant factors when determining the need for a valuation allowance with respect to these deferred tax assets. Realizability of deferred tax assets is dependent on the Company’s ability to generate future taxable income.credit facilitycustomer orders, current contract prices, industry analysis of supply and demand, seasonal factors, general economic trends and other information. When these analyses reflect estimated market values below the Company’s manufacturing costs, the Company records a charge to cost of goods sold in advance of when the inventory is actually sold. Differences in forecasted average selling prices used in calculating lower of cost or market adjustments can result in significant changes in the estimated net realizable value of product inventories and accordingly the amount of write-down recorded. Due to the volatile nature of the semiconductor memory industry, actual selling prices and volumes often vary significantly from projected prices and volumes and, as a result, the timing of when product costs are charged to operations can vary significantly. For example, a 5% variance in the estimated selling prices would have changed the estimated fair value of the Company’s inventory by enteringapproximately $43 million at the end of the second quarter of 2004.a new $250 million credit facility. In connection therewith, $50 million previously pledgedcategories in order to compare costs to market values. The amount of any inventory write-down can vary significantly depending on the determination of inventory categories. The Company’s inventory has been categorized as semiconductor memory or CMOS image sensors. The major characteristics the Company considers in determining inventory categories are product type and markets.collateral with respectflows expected to TECH’s credit facility was re-pledged and supplemented withresult from its use and/or disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an additional $50 million. Inimpairment loss is recognized equal to the eventamount by which the carrying value exceeds the estimated fair value of the assets. The estimation of future cash collateral is used to discharge obligations of TECH that are unpaid and due under the TECH credit facility, certain shareholders of TECH have agreed to indemnifyflows involves numerous assumptions which require judgment by the Company, for approximately one-halfincluding, but not limited to, future use of the amountassets for Company operations versus sale or disposal of the cash collateral used to satisfy such obligations.assets, future selling prices for the Company’s products and future production and sales volumes. In addition, judgment is required by the Company in determining the groups of assets for which impairment tests are separately performed.AsResearch and development: Costs related to the conceptual formulation and design of May 29, 2003, maturitiesproducts and processes are expensed as research and development when incurred. Determining when product development is complete requires judgment by the Company. The Company deems development of notes payable, future minimum lease payments under capital leasesa product complete once the product has been thoroughly reviewed and minimum commitments under operating leases were as follows:tested for performance and reliability.1917Certain Factors
forwardforward- looking statements made by or on behalf of the Company.IfWe have experienced dramatic declines in average selling prices for our memory products which have adversely affected our business.do not exceed our costs, we expect to incur losses.Average selling prices for our semiconductor products decreased byas follows: 17% for the first nine months ofin 2003, as compared to the first nine months of 2002. In five of the last six fiscal years, we experienced the following decreases in average selling prices for our semiconductor products: 53% in 2002, 60% in 2001, 37% in 1999, 60% in 1998 and 75% in 1997. We are unable to predict pricing conditions for any future period.In recent quarters,At times, average selling prices for our semiconductor products have been below our manufacturing costs. If average selling prices are belowfor our memory products decrease faster than we can decrease per megabit costs, in future periods, we expect to continue to incur losses on product sales and for our business, results of operations cash flows andor financial condition tocould be materially adversely affected. If the estimated market values of products held in finished goods and work in process inventories at a quarter end date are below the cost of these products, we recognize charges to cost of goods sold to write down the carrying value of our inventories to market value.If average selling prices of semiconductor products do not improve, we may not be able to generate sufficient cash flows to fund our operations and make adequate capital investments.Our cash flows from operations depend primarily on the volume of semiconductor memory sold, average selling prices and per megabit manufacturing costs. In recent quarters, average selling prices have been below our manufacturing costs. To develop new product and process technologies, support future growth, achieve operating efficiencies and maintain product quality, we must make significant capital investments in facilities and capital equipment, research and development, and product and process technology. Weak market conditions for the semiconductor industry have led us to significantly reduce actual and projected expenditures. If average selling prices do not improve, we may not be able to generate sufficient cash flows to fund our operations or make adequate capital investments. We have historically utilized external sources of financing. However, depending on general market and economic conditions or other factors, we may not be able to access capital markets for sufficient funds on acceptable terms.semiconductor productsDRAM could lead to further declines in average selling prices for DRAM or limit our ability to sell our products.DRAM.geometriesline-width process technologies and 300 mm wafers in the industry (which is expected to occur within the next five years) could, depending upon the rate of transition, lead to a significant increase in the worldwide supply of DRAM. Increases in worldwide supply of DRAM also result from DRAM fab capacity expansions, either by way of new facilities, increased capacity utilization or reallocation of other semiconductor production to DRAM production. Some of our competitors may receive government support to withstand downturns in the semiconductor memory market and to invest in technology resulting in increased worldwide supply. Increases in worldwide supply of DRAM, if not offset by increases in demand, could lead to further declines in average selling prices for our products and could materially adversely affect our business, results of operations cash flows andor financial condition. In addition, if a lack of demand for semiconductor products limits our ability to sell our inventory, our liquidity and financial condition could be adversely affected.Depressed pricing for semiconductor memory products may lead to future inventory write-downs.We recorded inventory write-downs of $15 million, $197 million and $91 million in the third, second and first quarters of 2003, respectively, and we recorded inventory write-downs totaling $376 million in 2002 and $727 million in 2001 as a result of the significant decreases in average selling prices for our semiconductor memory products. If the estimated market values of products held in finished goods and work in process inventories at a quarter end date are below the cost of these products, we recognize charges to cost of goods sold to write down the carrying value of our inventories to market value.20PCscomputers sold or the amount of semiconductor memory included in each PCcomputer decreases, sales of our semiconductor products could decrease.computercomputing market as most of the semiconductor products we sell are used in PCscomputers, servers or peripheral products. Approximately 80%75% of our sales of semiconductor products for the thirdsecond quarter of 2003 was2004 were to the computercomputing market. DRAMs are the most widely used semiconductor components in PCs.computers. In recent years, the growth rate of PCscomputers sold has slowed or declined. If we experience a sustained reduction in the growth rate of either PCscomputers sold or the average amount of semiconductor memory included in each PC,computer, sales of our semiconductor products built for those markets could decrease, and our business, results of operations cash flows andor financial condition could be materially adversely affected.someincluding Elpida Memory, Inc., Hynix Semiconductor Inc., Infineon Technologies AG and Samsung Electronics Co., Ltd. Some of whichthese competitors are large corporations or conglomerates (e.g. Samsung Semiconductor, Inc.) that may have greater resources to withstand downturns in the semiconductor memory market,markets in which we compete, invest in technology and capitalize on growth opportunities. These competitors seek to increase silicon capacity, improve yields, reduce die size and minimize mask levels in their product designs. These factors have significantly increased worldwide supply and put downward pressure on prices.Current economic and political conditions may harm our business.Global economic conditions and the effects of military or terrorist actions may cause significant disruptions to worldwide commerce. If these disruptions result in delays or cancellations of customer orders, a decrease in corporate spending on information technology or our inability to effectively market, manufacture or ship our products, our results of operations, cash flows and financial condition could be adversely affected. In addition, our ability to raise capital for capital expenditures, research and development and ongoing operations is dependent upon ready access to capital markets. During times of adverse global economic and political conditions, accessibility to capital markets could decrease. If we are unable to access the capital markets over an extended period of time, we may be unable to make capital expenditures, fully carry out our research and development efforts and fund operations, which could materially adversely affect our results of operations, cash flows and financial condition.If any one of our major PC customers significantly reduces its purchases of DRAM from us, our results of operations, cash flows and financial condition could be adversely affected.Aggregate sales to two of our PC customers approximated 26% of our net sales in the third quarter of 2003. If any one of our major PC customers significantly reduces its purchases of DRAM from us, our results of operations, cash flows and financial condition could be adversely affected.If our TECH joint venture experiences financial difficulty, or if our supply of semiconductor products from TECH is disrupted, our results of operations, cash flows and financial condition could be adversely affected.TECH supplied approximately 30% of the total megabits of memory produced by the Company in the third quarter and first nine months of 2003 and supplied approximately 20% in the third quarter and first nine months of 2002. We have agreements to purchase all of the production from TECH subject to specific terms and conditions. Any reduction in supply could adversely affect our results of operations, cash flows and financial condition. On March 13, 2003, TECH refinanced its then existing credit facility by entering into a new $250 million credit facility. In connection therewith, $50 million previously pledged by the Company as cash collateral with respect to TECH’s credit facility was re-pledged and supplemented with an additional $50 million. In the event the cash collateral is used to discharge obligations of TECH that are unpaid and due under the TECH credit facility, certain shareholders of TECH have agreed to indemnify the Company for approximately one-half of the amount of the cash collateral used to satisfy such obligations. As of May 29, 2003, we had remaining unamortized costs of $77 million in intangible assets relating to the supply arrangement to purchase product from TECH. In the event that our supply of semiconductor products from TECH is reduced or eliminated, we may be required to write off part or all of these assets and our revenues and results of operations would be adversely affected.2118Our ability to maintain or reduceReduction of per megabit manufacturing costs in future periods may be affected by:is dependent on our ability to: our ability to successfully implement product and process technology upgrades, specifically our ongoing transitionimprovements, including future transitions to .11µ95 nm and smaller line-width process technologies,ourachieve acceptable levels of manufacturing wafer output orand yields, which may decrease as we implement more complex technologies, including our transition to 300 mm wafer processing, and our ability to ramp the latest reduced die size versions of existing devices or new generation devices.devices andmayor financial condition could be materially adversely affected.relativelyincreasingly segmented, with diverse memory needs being driven by the different requirements of desktop and notebook PCs,computers, servers, workstations, handheld devices, and communications, industrial and other applications that demand specific memory solutions. We currently offer customers a variety of memory products, including DDR, SDRAM, SDRAM and Flash. In addition, we are designing and developing other semiconductor products, including DDRII SDRAM, GDDRII SDRAM, reduced latency DRAM (“RLDRAM”), CellularRAMEDO, DDR2, Flash, PSRAM and CMOS imagingimage sensors.mayor financial condition could be materially adversely affected.andor manufacturing processes infringe the intellectual property rights of others could materially adversely affect our business, results of operations cash flows andor financial condition.product or process technologyintellectual property rights. We are currently engaged in litigation with Rambus, Inc. (“Rambus”) relating to certain of Rambus’ patents and certain of our claims and defenses. On August 28, 2000,February 1, 2001, we filed a declaratory judgment actioncomplaint (amended) against Rambus in the U.S. District Court for the District of Delaware. On February 1, 2001, we amended our complaint. Pursuant toDelaware seeking monetary damages and declaratory and injunctive relief. Among other things, our amended complaint we are seeking (1) relief under thealleges violation of federal antitrust laws, for violations by Rambus of Section 2 of the Sherman Act; (2) a declaratory judgment that (a) certain Rambus patents are not infringed, are invalid and/or are unenforceable, (b) we have an implied license to Rambus’ patents, and (c) Rambus is estopped from enforcing its patents against us because of its conduct in the Joint Electron Device Engineering Council standards setting body; and (3) damages and declaratory relief for Rambus’ breach of contract, fraud, deceptive trade practices, and negligent misrepresentation,misrepresentation. The complaint also seeks a declaratory judgment (a) that certain Rambus patents are not infringed by us, are invalid, and/or are unenforceable (b) that we have an implied license to those patents and conduct requiring the application of equitable estoppel.(c) that Rambus is estopped from enforcing those patents against us. On February 15, 2001, Rambus filed an answer and counterclaim in Delaware denying that we are entitled to relief, and has alleged willful infringement by us of eight Rambus patents. In addition, Rambus has filed lawsuits against the Company in Italy, Germany, France and the United Kingdom alleging infringement of the eight Rambus patents named in our declaratory judgment claim, and seeking monetary damages and injunctive relief. A number of other suits are currently pending in Europe alleging that certain of our SDRAM and DDR SDRAM products infringe various of Rambus’ country counterparts to its European patent 525 068, including: on September 1, 2000, Rambus filed suit against Micron Semiconductor (Deutschland) GmbH in the District Court of Mannheim, Germany; on September 13, 2000, Rambus filed suit against Micron Europe Limited in the High Court of Justice, Chancery Division in London, England; on September 22, 2000, Rambus filed a complaint against us and Reptronic (a distributor of our products) in Court of First Instance of Paris, France; on September 29, 2000, we filed suit against Rambus in the Civil Court of Milan, Italy, alleging invalidity and non-infringement. In addition, on December 29, 2000, we filed suit against Rambus in the Civil Court of Avezzano, Italy, alleging invalidity and non-infringement of the Italian counterpart to European patents.patent 1 004 956. On August 10, 2001, Rambus filed suit against us and Assitec (an electronics retailer) in the Civil Court of Pavia, Italy, alleging that certain DDR SDRAM products infringe the Italian counterpart to European patent 1 022 642. In the European suits against us, Rambus is seeking monetary damages and injunctive relief. We are unable to predict the outcome of the Rambus suits or of other assertions of infringement that have been made, or may in the future be made against us.these suits. A court determination that our products or manufacturing processes or products infringe the product or processintellectual property rights of others could result in significant liability and/or require us to make material changes to our products and/or22twenty-foura number of purported class action lawsuits were filed against us and other DRAM suppliers. Sixteen cases were filed between June 21, 2002, and September 19, 2002, in the following federal district courts: one in the Southern District of New York, five in the District of Idaho and ten in the Northern District of California. Each of the federal district court cases purports to be on behalf of a class of individuals and entities who purchased DRAM directly from the various DRAM suppliers during a specified time period commencing on or after October 1, 2001. The complaints allege price-fixing in violation of the Sherman Act and seek treble monetary damages, costs,federalDRAM suppliers during the period from approximately November 1, 2001 through at least June 30, 2002. The consolidated amended complaint alleges price-fixing in violation of the Sherman Act and seeks treble monetary damages, costs, attorneys’ fees, and an injunction against the allegedly unlawful conduct. Eight additional cases were filed between August 2, 2002, and March 11, 2003, in the following California state superior courts: five in San Francisco County, one in Santa Clara County, one in Los Angeles County and one in Humboldt County. Each of the California state cases purports to be on behalf of a class of individuals and entities who indirectly purchased DRAM during a specified time period commencing December 1, 2001. The complaints allege violations of California’s Cartwright Act and state courts allegingunfair competition law and unjust enrichment and seek treble monetary damages, restitution, costs, attorneys’ fees, and an injunction against the allegedly unlawful conduct. The foregoing California state cases were transferred to San Francisco County Superior Court for consolidated proceedings. On October 15, 2003, the plaintiffs filed a consolidated amended class action complaint. The consolidated amended complaint purports to be on behalf of a class of individuals and entities who purchased DRAM indirectly from the various DRAM suppliers during the period from November 1, 2001 through June 30, 2002. The consolidated amended complaint alleges violations of the Federal Sherman Antitrust Act or California’s Cartwright Antitrust Act and Unfair Competition Lawstate unfair competition law and unjust enrichment and seeks treble monetary damages, costs, attorneys’ fees, and an injunction against the allegedly unlawful conduct. A case was filed on March 16, 2004 in state court in Salem, Massachusetts. It purports to be on behalf of a class of individuals and entities who indirectly purchased DRAM in Massachusetts between November 1, 2001 and June 30, 2002. The complaint alleges unjust enrichment relating to the sale and pricing of DRAM products. The complaints seek treble damages for the alleged damages sustained by purported class members, in addition to restitution, costsproducts and attorneys’ fees, as well asseeks an injunction against the allegedly unlawful conduct. There can be no assurance that additional purported class action lawsuits will not be filed against us, either within or without the United States.unspecified amount of restitution. We are unable to predict the outcome of these suits. Based upon our analysis of the claims made and the nature of the DRAM industry, we believe that class treatment of these cases is not appropriate and that any purported injury alleged by plaintiffs would be more appropriately resolved on a customer-by-customer basis. We cannot assure youcan give no assurance that the final resolution of these alleged violations of federal or state antitrust laws will not result in significant liability and will not have a material adverse effect on our business, results of operations andor financial condition.IfAllegations of anticompetitive practices.successfully transitionpredict the outcome of these suits. Based upon our operations to 300 mm wafer processing atanalysis of the claims made and the nature of the DRAM industry, we believe that class treatment of these cases is not appropriate time,and that any purported injury alleged by plaintiffs would be more appropriately resolved on a customer-by-customer basis. We can give no assurance that the final resolution will not result in significant liability and will not have a material adverse effect on our business, results of operations cash flowsor financial condition.We have If the estimated market values of products held in finished goods and work in process inventories at a quarter end date are below the past reduced our per megabit manufacturing costs by transitioningcost of these products, we recognize charges to larger wafer sizes. By transitioningcost of goods sold to larger wafers, we should be able to produce significantly more die for each wafer, resulting in substantially reduced costs for each die. Our transition to 300 mm wafer processing across a significant portionwrite down the carrying value of our operations will require usinventories to make substantial capital investments, which will depend on our ability to generate funds from operations or to obtain additional funds from external sources. We may also experience disruptions in manufacturing operations and reduced yields during our transition to larger wafer sizes. If we are unable to successfully transition to 300 mm wafer processing at the appropriate time, we could be at a cost disadvantage with respect to our competitors and our results of operations, cash flows and financial condition could be adversely affected.market value.not be successful.unsuccessful.or that we will be able to successfully market these products.products or that margins generated from sales of these products will recover costs of development efforts.cash flows andor financial condition.55%57% of our consolidated net sales infor the thirdsecond quarter of 2003.2004. In addition, we have or support manufacturing operations in Italy, Japan, Puerto Rico, Scotland and Singapore. Our international sales and operations are subject to a variety of risks, including:23cash flows andor financial condition.cash flows andor financial condition could be materially adversely affected.relationships.relationships, which could materially adversely affect our business results of operations or financial condition.cash flows andor financial condition.cash flows andor financial condition could be materially adversely affected.cash flows andor financial condition.need to replace product or otherwise compensate customers for costs incurred or damages caused by defective or incompatible product, and24 cash flows or financial condition. and debt are at fixed interest rates; therefore, the fair value of these instruments is affected by changes in market interest rates. The Company believes that the market risk arising from its holdings of investments is minimal as the Company’s investments generally mature within one year.carryingestimated fair market value of the Company’s debt was $1,097 million at Mayas of March 4, 2004 and August 28, 2003, approximated $1.5 billion and $1.3 billion, respectively. The Company entered into an interest rate swap agreement (the “Swap”) that effectively converted, beginning August 29, 2003, the 2.5% fixed interest rate on the Company’s $632.5 million Convertible Subordinated Notes (the “Notes”) to a variable interest rate based on the 3-month London Interbank Offering Rate (“LIBOR”) less 65 basis points. The Swap qualifies as a fair-value hedge under SFAS No. 133, “Accounting for Derivative Instruments and $454 millionHedging Activities.” The gain or loss from changes in the fair value of the Swap is expected to be highly effective at August 29, 2002.offsetting the gain or loss from changes in the fair value of the Notes attributable to changes in interest rates.approximately U.S. $187$184.9 million as of May 29, 2003,March 4, 2004, and U.S. $220$203.1 million as of August 29, 200228, 2003 (including deferred income tax assets denominated in Japanese Yenyen valued at approximately U.S. $114$85.0 million as of May 29, 2003,March 4, 2004, and U.S. $165$105.4 million as of August 29, 2002)28, 2003). The Company also held aggregate foreign currency liabilities valued at approximately U.S. $467$442.4 million as of May 29, 2003,March 4, 2004, and U.S. $434$513.2 million as of August 29, 200228, 2003 (including debt denominated in Japanese Yenyen valued at approximately U.S. $172$144.1 million as of May 29, 2003,March 4, 2004, and U.S. $233$170.5 million as of August 29, 2002)28, 2003). Foreign currency receivables and payables as of March 4, 2004, were comprised primarily of Japanese Yen, Euros,yen, euros, Singapore Dollarsdollars and British Pounds.pounds.The Company estimates that, based on its assets and liabilities denominated in currencies other than U.S. dollar as of March 4, 2004, a 1% change in the exchange rate versus the U.S. dollar would result in foreign currency gains or losses of approximately $2 million for the Japanese yen and $1 million for the euro.
As of a date within the 90-day period prior to the filing date of this report, anAn evaluation was carried out under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-14 and 15d-14 under the Securities Exchange Act of 1934). as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that those disclosure controls and procedures were adequateeffective to ensure that material information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms.ThereDuring the quarterly period covered by this report, there were no significant changes in the Company’s internal controls over financial reporting that have materially affected, or in other factors that could significantlyare reasonably likely to materially affect, thesethe Company’s internal controls subsequent to the date of their evaluation. There were no significant deficiencies or material weaknesses noted during the evaluation, and therefore no corrective actions were taken.over financial reporting.PartPART II. OTHER INFORMATIONAugust 28, 2000,February 1, 2001, the Company filed a declaratory judgment actioncomplaint (amended) against Rambus, Inc. (“Rambus”) in U.S. District Court for the District of Delaware. On February 1, 2001,Delaware seeking monetary damages and declaratory and injunctive relief. Among other things, the Company amended its complaint. Pursuant to itsCompany’s amended complaint the Company is seeking (1) relief under thealleges violation of federal antitrust laws, for violations by Rambusbreach of Section 2 of the Sherman Act; (2)contract, fraud, deceptive trade practices, and negligent misrepresentation. The complaint also seeks a declaratory judgment (a) that certain Rambus patents are not infringed by the Company, are invalid, and/or are unenforceable due to, among other reasons, Rambus’ fraudulent conduct in misusing and enforcing those patents, (b) that the Company has an implied license to those patents and (c) that Rambus is estopped from enforcing those patents against the Company because of its conduct in the Joint Electron Device Engineering Council, and (3) damages and declaratory relief for Rambus’ breach of contract, fraud, deceptive trade practices, negligent misrepresentation, and conduct requiring the application of equitable estoppel.Company. On February 15, 2001, Rambus filed an answer and counterclaim against the Company in Delaware denying that the Company is entitled to relief, and alleging infringement of the eight Rambus patents subject tonamed in the Company’s declaratory judgment action. Onclaim, and seeking monetary damages and injunctive relief. A number of other suits are currently pending in Europe alleging that certain of the Company’s SDRAM and DDR SDRAM products infringe various of Rambus’ country counterparts to its European patent 525 068, including: on September 1, 2000, Rambus filed suit against Micron Semiconductor (Deutschland) GmbH in the District Court of Mannheim, Germany, alleging that certain SDRAM and DDR SDRAM products infringe German patent and utility model counterparts to European patent 525 068. OnGermany; on September 13, 2000, Rambus filed suit against Micron Europe Limited in the High Court of Justice, Chancery Division in London, England, alleging that certain SDRAM and DDR SDRAM products infringe the U.K. counterpart to European patent 525 068. OnEngland; on September 22, 2000, Rambus filed a complaint against the Company and Reptronic (a distributor of the Company’sour products) in Court of First Instance of Paris, France, alleging that certain SDRAM and DDR SDRAM products infringe the French counterpart to European patent 525 068. In its suits against the Company, Rambus is seeking monetary damages and injunctive relief. OnFrance; on September 29, 2000, the Company filed suit against Rambus in the Civil Court of Milan, Italy, alleging invalidity and non-infringement of the Italian counterpart to European patent 525 068. On September 29, 2000, Rambus filed a preliminary proceeding against the Company and EBV (a distributor of the Company’s products) in the Civil Court of Monza, Italy, alleging that certain SDRAM products infringe the Italian counterpart to European patent 525 068, and seeking the seizure of certain materials and the entry of a preliminary injunction as to products manufactured at the Company’s Avezzano, Italy, site. On December 21, 2000, an appeals panel of the Court of Monza held that the Monza trial court had no jurisdiction to adjudicate the seizure matter. The Monza trial court ordered that technical review proceedings continue with respect to the issue of preliminary injunction. On May 24, 2001, the trial court rejected Rambus’ assertions of infringement and denied its request for a preliminary injunction. Rambus’ appeal from the trial judge’s ruling was rejected by the Monza appeals panelnon-infringement. In addition, on July 18, 2001. On December 29, 2000, the Company filed suit against Rambus in the Civil Court of Avezzano, Italy, alleging invalidity and non-infringement of the Italian counterpart to European patent 1 004 956. On August 10, 2001, Rambus filed suit against the Company and Assitec (an electronics retailer) in the Civil Court of Pavia, Italy, alleging that certain DDR SDRAM products infringe the Italian counterpart to European patent 1 022 642. In the European suits against the Company, Rambus is seeking monetary damages and injunctive relief. The Company is unable to predict the outcome of these suits. A court determination that the Company’s products or manufacturing processes or products infringe the product or processintellectual property rights of others could result in significant liability and/or require the Company to make material changes to its products and/or manufacturing processes. Any of the foregoing results could have a material adverse effect on the Company’s business, results of operations or financial condition. in unspecified amounts, costs, attorneys’ fees, and an injunction against the allegedly unlawful conduct. On September 2002, the Judicial Panel on Multi-District Litigation (“JPML”) held a hearing and subsequently ordered that thebewere transferred to the U.S. District Court for the Northern26coordinated or consolidated pretrial proceedings. On October 6, 2003, the plaintiffs filed a consolidated amended class action complaint. The consolidated amended complaint purports to be on behalf of a class of individuals and entities who purchased DRAM directly from the various DRAM suppliers during the period from approximately November 1, 2001 through at least June 30, 2002. The consolidated amended complaint alleges price-fixing in violation of the Sherman Act and seeks treble monetary damages, costs, attorneys’ fees, and an injunction against the allegedly unlawful conduct. Eight additional cases were filed between August 2, 2002, and March 11, 2003, in the following California state superior courts: five in San Francisco County, one in Santa Clara County, one in Los Angeles County, and one in HumboltHumboldt County. Each of the California state cases purports to be on behalf of a class of individuals and entities who indirectly purchased DRAM during a specified time period commencing December 1, 2001. The complaints allege violations of California’s Cartwright Act and Unfair Competition Lawstate unfair competition law and unjust enrichment and seek treble monetary damages, in unspecified amounts, restitution, costs, attorneys’ fees, and an injunction against the allegedly unlawful conduct. In response to a petition filed by one of the plaintiffs, a judge appointed by the Judicial Council ofThe foregoing California subsequently ordered that the then-pending state cases be coordinated for pretrial purposes and recommended that they bewere transferred to San Francisco County Superior Court for coordinated or consolidated pretrial proceedings. On October 15, 2003, the plaintiffs filed a consolidated amended class action complaint. The consolidated amended complaint purports to be on behalf of a class of individuals and entities who purchased DRAM indirectly from the various DRAM suppliers during the period from November 1, 2001 through June 30, 2002. The consolidated amended complaint alleges violations of California’s Cartwright Act and state unfair competition law and unjust enrichment and seeks treble monetary damages, costs, attorneys’ fees, and an injunction against the allegedly unlawful conduct. A case was filed on March 16, 2004 in state court in Salem, Massachusetts. It purports to be on behalf of a class of individuals and entities who indirectly purchased DRAM in Massachusetts between November 1, 2001 and June 30, 2002. The complaint alleges unjust enrichment relating to the sale and pricing of DRAM products and seeks an unspecified amount of restitution. The Company is unable to predict the outcome of these suits. Based upon the Company’s analysis of the claims made and the nature of the DRAM industry, the Company believes that class treatment of these cases is not appropriate and that any purported injury alleged by plaintiffs would be more appropriately resolved on a customer-by-customer basis. The Company can give no assurance that the final resolution will not result in significant liability and will not have a material adverse effect on the Company’s business, results of operations andor financial condition.
Number99.131.1May 29, 2003:March 4, 2004:April 25,December 23, 20035, Other EventsMay 1, 2003Item 5, Other Events12, Disclosure of Results of Operations and Financial Condition2728July 11, 2003April 19, 2004
Chief Financial Officer (Principal Financial and
Accounting Officer)28CERTIFICATIONI, Steven R. Appleton, certify that:1. I have reviewed this quarterly report on Form 10-Q of Micron Technology, Inc.;2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;b. evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); andc. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; andb. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.Date: July 11, 2003/s/ Steven R. AppletonSteven R. AppletonChief Executive OfficerCERTIFICATIONI, Wilbur G. Stover, Jr., certify that:1. I have reviewed this quarterly report on Form 10-Q of Micron Technology, Inc.;2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;b. evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); andc. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; andb. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.Date: July 11, 2003/s/ W. G. Stover, Jr.W. G. Stover, Jr.Chief Financial Officer30